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Recently, I answered a question for Debbie, a freelancer, who asked:
I’m self employed and my earnings seem to only be limited by the amount of time I have to work… I’m trading “hours for dollars” at this point. I only have so many hours I can work, and I’m working during all of them 🙂 I’m in a lot of debt… and just about everything my husband and I earn is turned right back into our existing debt/bills. How do we get a head when we seem to be stuck ?
As I said to Debbie, it all really depends on Your Number – and when you need it (i.e. Your Date):
1. Most freelancers are basically holding a job, without the 401k and other corporate perks, in return for a reasonable hourly salary and some flexibility. For most freelancers, though, when they stop [working] their income stops, too!
2 Some freelancers get smart and realize this, and spend as much time investing as they do earning (Scott shared a good example of a doctor who invested in real-estate and in setting up – then selling – practices). They can build up a decent nest-egg, perhaps into the $1 million to $4 million range, but for the reasons that I cover in that article, probably not much more.
Being a freelancer – or, other self-employed professional – limits your ability to retire early/rich, although some would say that $4 million is a lot … and, it is:
You will see that the guy who achieved this mixed investing in real-estate and businesses to get there.
The problem is that when you are a freelancer/professional, you are trading TIME to earn MONEY …
…. NEVER a good trade!
Let’s think about this: time is a finite resource … believe me, as you get older you will realize just how finite it is.
I previously mentioned this concept in a post about managing rental properties.
Interestingly, a British professor has actually proved that Time = Money, and has even provided a formula for calculating it:
… where V is the value of an hour, W is a person’s hourly wage, t is the tax rate and C is the local cost of living.
It shows that there is no such thing as a free lunch or even a free dinner, while brushing your teeth for three minutes uses up 30 pence (45 cents) in “lost” time, and washing a car by hand has a hidden cost of £3 ($4.50).
Economics professor Ian Walker, of central England’s Warwick University, says process can show people just how valuable their time is in relation to any task they have to perform, from a lie-in or cooking a meal to sleeping and working.
So, if Time is Money, which one is limited (finite) and which one is (unlimited (infinite)? And, why would anybody trade a finite resource (time) for an infinite one (money)?!
This means that selling yourself by the hour (until you gradually, and inevitably, run out of ‘product’ – being YOU – to sell), you are actually limiting your earning potential and wealth.
Perhaps a little counter-intuitively at first (until you understand the money/time trade-off is clearly stacked in favor of conserving time) you begin to realize that when you stop selling yourself, you actually remove limitations to your future wealth.
Therefore, you are far better off financially, thinking of ways to earn income that do not involve the direct use of your own time, but the time and resources of others.
Another term for this is leverage …
It helps to explain why real businesses earn more, and sell for more, than consulting practices.
So, as I said to Debbie
Let’s wind-up Debbie Inc. and consider this time to start creating D Enterprises Inc. and/or D Investments Inc.
One simple example, is to turn your consulting freelancing practice into a freelancing business: one where you employ other freelancers (as long as you also employ even more ‘others’ to find both the clients and the ‘freelancing others’).
An even better example, is eLance, where you simply create an environment where customers and freelancers can get together and do business …
… as I am currently doing with Muhammad in Pakistan for the princely sum of $4 per hour!
eLance makes an 8% commission for introducing the contractors to the clients and handling the payments via credit card … even while eLance’s owners are asleep!