Saying goodbye to your safe cushy job to become self-employed might seem crazy at first. After all, you’re getting a nice paycheck on a regular basis to show up and look busy while you’re actually on the internet clicking on cat pictures…Ok, only some people are doing that.
For many of us, the thought of leaving your job to work for yourself just doesn’t seem feasible and for some that may be true. But just like investing in stocks, sometimes you have to take additional risk to get additional rewards.
About four years ago, I left my full-time job at a software company after many years in order to do the same job (consulting) on my own. I had thought about making the jump to self-employment for years at that point and had finally pulled the trigger. I still remember how terrified I was at the airport when I was about to fly out to meet my first client. I had signed a 6 month consulting contract but I couldn’t help asking myself questions like “is this a real contract“ and “are they really going to pay me this much per hour”. I thought that maybe I’d show up on that first day and they’d tell me it was all a joke or that they had changed their mind. At the same time, I immediately felt a sense of freedom. For the first time I was fully in control of my career and not just another employee working for some big company.
In this post I’ll go over some of the top benefits of taking the plunge to self-employment as well as some of the risks. My perspective might be a bit more geared towards someone from a similar background as myself (consulting and/or the tech industry) but I think these apply to many different careers.
1. Earning Potential
Your earning potential when you’re self-employed is drastically increased and depending on the type of business, the potential could be unlimited. If you’re doing consulting as I am, you’re obviously still trading time for money so there is a limit to how much you can make. However, the potential is still far more when compared to what an employer will pay you in many cases. In my case, I’ve consistently earned between 2 1/2 to 3 times as much per year on my own as compared to my highest salary when I was an employee. There are multiple reasons that it’s possible to earn so much more on your own.
For one, you have the freedom to take on as many customers as you can handle, so the harder you hustle the more you can make. In consulting, for example, instead of working on a single project for 40 hours or more each week, you could add one or more smaller projects that allow you to bill additional hours every week. I’ve even seen some consultants that are billing 80 hours per week by taking on two projects concurrently that are each 40 hours per week. This does require some juggling and extremely hard work but it’s definitely possible.
Personally, I typically only work on a single large project the majority of the time in order to give my full focus to one client and build a strong relationship for the future (which helps out with getting contract extensions and other future work). Going forward, my goal is to occasionally add on smaller projects of maybe 16-20 hours of additional work each week on top of whatever main project I’m working on.
In addition to working additional projects, if a customer needs me to work more than 40 hours in a week, I get paid for every single hour I work. When I was an employee, I received the same pay no matter how many extra hours I worked (technically extra time was taken into account when calculating bonuses, but it barely impacted how much extra I could earn).
Second, you can set your own rates and the more in demand or niche your skills are, the more you can charge for your time. As an employee, my former company would bill me out to clients for over $200/hour and pay me a salary that worked out to a bit over $40/hour. As an independent consultant, I’m not able to charge rates as high as my former company but the rates I’m able to charge are far higher than what my hourly pay came out to as an employee. The lowest rates I fetch now are still ~3 times as much as my hourly pay in my highest earning year at my full-time job. Plus it’s a win-win since my customers are able to save a lot of money by paying the lower rate and still get an experienced consultant.
In the tech world, for example, there are many technologies/platforms that have a huge install base of customers that are always looking for consultants for new implementations, upgrades, maintenance, support, etc. Since it saves them money compared to paying the higher rates charged by software and consulting companies, they’re happy to contract out work to independent consultants with strong experience. In my experience, there are a ton of projects that are also at least 6 months long and are typically a guaranteed 40 hours of work per week so you don’t have to constantly be looking for new projects/clients. If you impress them with your work, you’re also more likely to get additional contracts for future projects with the same client.
2. Getting Ahead on Retirement/Financial Freedom
When you’re self-employed, you have access to some retirement plans that allow you to save a lot more per year than you can in a standard 401(k) or 403(b) with your employer. The current annual contribution limit for either a 401(k) or 403(b) is $18,000 but for a SEP-IRA or a Solo 401(k), you can contribute up to $53,000* per year!
Contributing $53,000 per year to a retirement plan may seem crazy to some, and will of course not be possible for everyone. However, if you’re fortunate to be able to earn enough to contribute that much per year, you should also be looking for a way to reduce the massive tax bill that you’ll likely get at the end of the year. All contributions to these retirement plans will be a deduction at tax time and in my personal situation, they’re my biggest deduction each year.
When I started working for myself, I initially thought it was out of the question to “lock up” that much money until I reach 59 1/2 years old (there are ways to access the money sooner BTW) until I realized how much it would save me in taxes. My opinion now is that if you’re in the 33% and above tax brackets, you should absolutely contribute the max in order to get the tax deduction now. Even in the 25 and 28% tax brackets, I think it’s best to max out your contributions each year. This allows you to not only reduce your taxes now but also to have more money invested and compounding for a longer period of time (this can be huge, see The Magic of Compounding: Motivation to Invest Now). After maxing out your contributions for a few years you’ll see your retirement savings really adding up fast!
Another huge benefit of being self-employed is the extra freedom. The type and amount of freedom depends on your line of work but may include being able to work from home, the ability to set your own hours, and being able to travel whenever you want.
Not having to go into an office every day can be a huge benefit. Not only does this save you valuable time every day by not having to commute and “get ready” for work in the mornings, it also saves you money. You’ll save money on transportation costs such as gas and car maintenance, food (it’s much easier to eat leftovers or make a quick lunch instead of going out to eat every day with coworkers), and on clothes…Yes it’s true, when you work from home you tend to work in your pajamas! In addition, you can travel and work from wherever you are.
If you’re able to work remotely and you’re also able to set your own hours, then this really opens up your options as you can work from anywhere in the world as long as you have an internet connection. If you want to go visit family on the other side of the planet or maybe take an RV trip across the country, all of these are possibilities.
While I do occasionally have projects that require more travel, over 90% of my work in the past couple of years has all been done remotely. Since my clients have no idea where I’m calling from when I join a conference call, I can be calling from anywhere in the world. As long as I’m getting all of my work done and joining any meetings that I need to be a part of, it doesn’t matter where I’m working from. For this reason, I’ve been able to take many trips to visit family for a week or more and just work from their house during my business hours.
4. More Control over Your Work
As a self-employed consultant I have far more control over which projects I work on vs. when I was an employee and was assigned to projects with little to no say in the matter. While my first project on my own did require traveling every week for over a year, nowadays I’m lucky enough to be able to be a bit more selective and choose projects with very little travel.
If I’m contacted about a potential project and it just doesn’t seem interesting or maybe the fit with the client doesn’t feel like a good match, I can just say NO and find something else. If I get to a point where I’ve been on a project for a long time and want a change of scenery for whatever reason, I can just go and find a new project to work on for a different client.
Having more control over your work like this definitely makes you happier in the long run and helps to prevent burnout.
5. Keeps You Motivated
When you’re working for yourself, you have no choice but to keep on working hard and hustling to make sure you keep getting paid. You’re no longer guaranteed a set salary from one employer so the quality of your work becomes even more important in securing additional work going forward. If the quality of your work isn’t up to par, it’s easier for companies to “fire” you when you’re a contractor vs. when you’re an employee.
Since you’re also representing yourself instead of some company that you may or may not care about, you have more incentive to impress clients than ever before. This will keep you motivated to do a better job for your clients and to stay more engaged in your work.
This one might seem like a negative to some people but I think it’s definitely a positive. If you’re not engaged in your work and don’t care too much about the future of the company you’re working for, you’re going to get bored with your job and start dreading the work more and more over time.
There are Some Risks and Drawbacks
So far in this post I’ve only talked about the positives of becoming self-employed but I think it’s also important to mention some of the risks and potential negatives.
Not earning as much as you did previously – I think probably the biggest risk for most people is that you could earn less than you did as an employee but this again depends on what type of work you do. If you sign a contract to do some type of consulting, you might immediately start out making much more than you did as an employee, but you could have periods of time where you have no work at all. For many types of businesses, it will likely take some time before you’re able to get to the same level of earnings. In addition to periods of no/lower pay, your pay will probably be more irregular so you have to manage your cash flow. For these reasons, I’d recommend two things.
- Build up an emergency fund to support yourself in case you start out slow or have periods where business slows down. While people in stable jobs are usually fine with a 3-6 month emergency fund, I’d recommend a 6-12 month emergency fund if you’re self-employed.
- Start up your business while you’re still working your day job if possible. This will help you to both get a sense of what your earnings potential might be but also allow you to save extra money before leaving your day job.
Insurance and other benefits – Since you’ll no longer have the benefit of getting insurance through an employer, you’ll have to either purchase your own or get it through your spouse or domestic partner. If your significant other works full-time and has benefits, this will likely be your best and cheapest option. Otherwise, it could be quite expensive to buy health insurance on your own. Also, don’t forget about dental, vision, disability, and life insurance if those are appropriate. Another benefit that you’ll no longer have is paid vacation time. While you can take vacation at any time you want, you’re likely not going to make any money when you’re not working (though some business types may allow you to still get paid when you’re not working).
Longer hours – When you work for yourself, you are responsible for not only the core work but also everything else to keep the business running. At times you will play the role of accounts receivable when you’re sending invoices and contacting clients to find out the status of those invoices. At other times you may be playing the role of sales and marketing in trying to expand your business and “sell” to potential clients. Even if you’re able to outsource some of these tasks to someone else, you’re likely going to be working longer hours, at least initially.
More taxes – When you’re self-employed, you have to pay self-employment taxes. As an employee, your wages are taxed at 6.2% for Social Security (on the first $118,500 in earnings) and at 1.45% for Medicare taxes, for a total of 7.65% of your wages. Your employer also has to contribute the same 7.65% of your wages for a total of 15.3%. When you’re self-employed, you are both the employee and the employer so you have to pay 15.3% for Social Security and Medicare (12.4% in Social Security on the first $118,500 in earnings and 2.9% in Medicare on every dollar of earnings).
Wrapping It Up
Between the dramatically increased earning potential and ability to save aggressively for the future as well as granting you more freedom and control over your work, self-employment can be a great option for a lot of people.
For those that have expertise in a particular product or a skill that’s in high demand, has a large customer base, and the potential for long-term projects and/or consistent work, it seems like a no-brainer to try and work on your own at some point in your career. Strike while the iron is hot to capitalize on the higher earnings. Why should your employer get the bulk of the profits when you’re the expert doing all of the work and adding most of the value?
I’ve personally been able to increase my net worth by leaps and bounds since I started working for myself. This has gotten me that much closer to the ultimate goal of financial freedom so that’s been the best benefit of all.
*This depends on your earnings and how your business is structured. Bankrate has a calculator that shows you how much you can contribute to the various types of self-employed retirement plans based on business type, income, and age. The calculator can be accessed at the following URL: http://www.bankrate.com/calculators/retirement/self-employed-401-k-calculator.aspx