When inflation rises rapidly, few workers are left unscathed. Those with traditional salaries and yearly cost-of-living boosts can make up a portion of the rising costs, although it often takes time to go into effect. For the self-employed, though, it threatens your very livelihood since it’s on you to make sure your income keeps up.
This issue has come into focus with the recent surge in inflation, which grew 8.6% in the year ending in May 2022, reaching a 40-year high. This rise is the result of many macroeconomic trends, such as the economy bursting forward during the pandemic recovery, along with the impact of the Ukraine crisis, among other reasons. Salaries have yet had a chance to catch up. By February 2022, only 18% of workers could say that their household income had grown with inflation. Among those making $100,000 or more, 31% said that pay had kept up with inflation.
For workers, these raises require a reliance on their employer. For the self-employed, it necessitates building in raises with clients. This demands you take important steps to ensure your pay can keep up with inflation while not scaring clients away with higher prices.
Set the rates that you need
A key aspect of increasing income as a self-employed contractor or freelancer also requires charging more for your services. To develop rates, particularly for services that do not have set costs, you first must have an idea of what you want to make in a year.
Say you’re targeting income of $100,000 and you want to work 35 hours a week for 48 weeks (to allow room for vacation). Then it requires simple arithmetic to determine the hour rate you would need to charge to reach that mark. Based on this scenario, you would need to charge about $60/hour if every single hour you want to work is billed. Say of the 35 hours per week, you’ll actually work on client business for 30 hours, with the other five allotted to accounting, new business or other areas that self-employed workers must manage. This would increase the per hour rate to nearly $70.
Now, if you want to increase income, sticking to inflation, then it would require increasing your goals for the year. Instead of $100,000, it’s about $109,000 based on May 2022’s inflation rate. Then you would do the same math, just using the higher annual number. In the current example, it would require you to increase the per hour rate to nearly $76 if you’re allotting 30 hours per week for client work.
Give yourself a raise
Now that you know how much you need to make per hour to ensure you reach your target goal and allow your pay to rise with inflation, it’s time to incorporate that into your business. This doesn’t necessarily require you to go to your clients and ask for a higher amount per hour. Instead, you can take a proactive approach to shifting towards this higher rate, without directly having the conversation.
For example, if you have a project that the company believes requires 10 hours, but you know you can do in 8.5 hours, then you’ve essentially reduced the amount you bill per hour of actual work. Sure, the company thinks you have worked for 10 hours, but cares far more that you did a good job. And you have 1.5 hours that you now can apply to a different project. In essence, you’ve increased your per-hour rate without any conversation with your client regarding pay.
Another tactic? Say you’re discussing a project that requires certain parameters, but under the current outline you can’t achieve your rate. What can you tweak, in a conversation with the client, so they’re still getting what they need but it’s also allowing you to accomplish the task in the time that works for you? Say it’s cutting a small percentage of the overall project – for writers, instead of a 1,500-word piece, maybe it’s cutting it to 1,200. For coders, maybe it’s reducing the overall size of the work by a certain percentage. For designers, it might mean one or two less graphics. You’ll have to adapt based on the industry you operate in.
If you can’t come up with the cuts yourself, you can talk to the client about what’s important and what’s not, and then come to a professional agreement. If the parameters don’t work for you, then also be prepared to say ‘no.’
Build in regular raises
In some industries, the ability to build in raises can be part of an annual cycle. For instance, if you’re a therapist working for yourself, then it’s simply a one-on-one communication with clients. If you build in yearly rate hikes – a small percentage of the overall fee – by providing an explanation, most clients will understand. Sure, some may decide to look elsewhere, but you will have a stronger base of core clients and then you can find new clients with the built-in higher rates.
Going this route can result in a slower raise, since you’ll have to wait for the one-time of year that you increase pay (similar to in-house employees). But, overtime, it should help your rates keep up with the cost of goods.
Inflation, while heightened today, isn’t an unusual phenomenon in financial planning. In fact, it’s among the most important wrinkles of finance, which requires long-term preparation. Without inflation, you could simply save money in a savings account. But in a world with inflation, it requires that your savings make more than inflation over the long term.
For the self-employed, it also demands that you place more of the money you make today into retirement and investment accounts. The more you can stock away today, the more time it has to grow – even through the current bear market – and build to a size that can provide retirement income when needed. But, also, by saving it today, you’re able to hold onto more of the income you bring in.
Through tools, like a SEP-IRA, the self-employed can store the lesser of $61,000 a year or up to 25% of the income, after accounting for a portion of Social Security and Medicare taxes. By doing so, you’re holding onto a larger chunk of your income.
This builds your net worth, giving you protection in these moments where you feel the brunt of the heightened inflation impact.