I get paid on an hourly rate, and one of the things I do obsessively these days is try to figure out what sort of hourly rate I would need to generate as a freelancer. There are a million imponderables, of course – different rates for different tasks, different rates for different clients, include expenses or not, and so on. But one of the interesting exercises I did was try to figure out what I actually make today on an hourly basis including all of my daily expenses. I learned a couple of things from this calculation.
So for the sake of this example, here are a few of the variables:
Commuting hours 2.5
Tax rate 25%
Coffee, extras 4.00
Public transport 5.25
Gas, wear and tear 1.50
Dry clean shirts 0.75
A few of these costs are more or less fixed. The tax rate is a rough estimate. My federal and state rates are higher, but get reduced due to mortgage interest deductions, etc. I usually figure 25% is a fair approximation of what finally goes out.
My parking and public transportation costs are hard to alter. The public transportation is reduced slightly by using an FSA pre-tax benefit card, so that’s $5.25 rather than the post-tax $7.00 per day. The parking is the best rate I can find near my station. I could take a light rail near my house that would cost $6 per day instead of $8, but would increase my commuting hours by another hour per day at a minimum.
Gas and wear and tear on my car is a very rough estimate. I fill up less than once per month, since we don’t use my car for family driving. So for the sake of argument it costs me $50 per 60 days to operate the car, plus a little for wear and tear on the tires, oil, etc. The federal mileage allowance is $.485 per mile (http://hr.blr.com/human_resources/mileage_allowance.htm), and I drive about 4 miles round trip per day, or $1.94. So split the difference, $1.50.
Dry cleaning my shirts costs $.75 per day. I’ve tried to shy away from the fancier shirts and pants I used to prefer that required dry cleaning, rather than just launder-and-press. $.75 is a lot per day, but I think the amount of time spent on ironing isn’t worth it. The shirts won’t look as good and it just takes me too long to do it.
The killer in this calculation was the lunch and extras. I like a salad for lunch most days, and of course the salad bar is a quick and easy option. I get a by-the-pound salad, so a cucumber slice costs a lot more than a piece of lettuce. I started tracking my costs and was surprised that I average $8 per day on salad. This is part of the battle between health and wealth. I need to cut it down, though.
The extras are the worst item. I sometimes want water on the subway. It gets hot and the air is tepid, and a cold bottle of spring water really helps. That costs $1 if I forget to pick up a case from the supermarket. My client doesn’t have coffee machines, so that’s another $1.50 for cafeteria coffee. And inevitably during the day I may want a seltzer, or an apple. So that may run anywhere from $0 to $4 per day. I recently started drinking black tea at work, since a bag of Tazo high-end black tea costs 20 cents per tea bag and has just as much caffeine as coffee. That should save me about $300 per year.
After all of those expenses pile in, my net is much lower. If you include my commute time in the calculation, that’s about $26/hour, or $208 per day. If you don’t include commute time, it’s $34/hour and $272 per day. I include the commute time since that’s working time – I’m not doing it for fun.
What can I take away from this? All of these expenses are directly arising from traveling in to a major metropolitan area to work. I effectively make $26 per hour on a 10-10.5 hour day. So if I worked from home making $30 per hour after tax, 8 hours per day, I’d be better off. In my industry $70 to $100 per hour pre-tax is a fairly common and easy range to achieve for in-office work. I don’t have a good estimate or remote work, because auditing is typically on-site.
This exercise made me realize two things: 1, if I worked from home I could charge a much, much lower rate than I charge for going into the office and still net more. 2, I spend an awful lot on unnecessary items. As a consultant, I often talk myself out of bringing my lunch, since I don’t know where I’ll be, or I won’t know if they have a fridge, or whether this will be the day my client wants to have a lunch meeting. I should learn to overcome that, because $12/day is ridiculous.
Using these numbers, though, my main thought was that 50% of my rate is gone before it hits the bank account, effectively. That is a sobering percentage.