Pricing Methods Part 2: What is an hour of your time worth to you?

A lot of service providers, especially people who do spiritual work like spiritual guidance or weddings, have a hard time deciding what to charge for their services. Many of my clients simply decide on an hourly rate based on their comfort level or what other people charge for similar work.

But when it comes to generating sustainable income from self-employment there are many variables to consider. It’s helpful to first know what an hour of your time is worth to you before you decide on a service or fee structure.

In future articles I’ll go into more detail about how to price your services. In this article, though, I’ll help you determine what your time is worth to you. Once you know the answer it will be easier to create services and fees that work for you and your clients.

So, what is an hour of your time worth to you?

When I ask self-employed people how much they charge for their services they often say something like, “$50 an hour.” The hourly rate varies by person. Sometimes it’s much higher, other times lower.

My next question is about their annual income goals. The answer might be something like “$80,000” but also varies by the person.

It’s not uncommon for people to have a completely unrealistic combination of hourly rate and annual desired salary. For instance, making $80,000 by charging $50 an hour is difficult, at best.

Here’s why:

When you work full-time for an established company you typically work a minimum of 40 hours a week so it’s natural for a self-employed people to assume they’d base their annual salary goals on 40 hours a week.

But, when you’re self-employed, half of the 40 hours needs to be spent on business administration like finances, marketing, organizing and creating products (ezine, services, books, workshops, etc.). And, you don’t get paid for the time you spend on these tasks.

This means you have about 20 hours a week for billable client hours. 20 hours a week times 52 weeks a year is 1040 billable hours.

Unfortunately, that figure doesn’t include time off. Planning for vacation and rest is essential for self-employed people.

If you plan to work 48 weeks a year instead of 52, that reduces your billable time to 960 hours.

So a more realistic salary goal for charging $50 an hour is $48,000 a year.

$50 x 960 hours = $48,000.

But if you must make $80,000 annually, you need to raise your hourly rates to about $85.

$85 x 960 hours = $81,600

Of course, it takes time and momentum to build up to 20 paying clients a week.

And, depending on your circumstances you can’t always charge a higher fee just because you need to work less hours and make more money. Additionally, you may not want to work 20 hours a week with clients.

If you’re a spiritual director, for instance, you can’t easily charge $300 an hour for your services just because you want to make more money. There just isn’t a market for it.

Or if you’re a massage therapist you may not want 20 clients a week. That’s a lot of hard work and your body may not be able to handle that much physical labor.

This is why you need to determine how many hours a week you can reasonably work with people.

This is also why smart people do not rely on hourly rate services to make money.

Instead, they have a variety of ways of earning an income, from selling low price items to having group programs. There are many ways to generate an income.

For now, if you’re just starting out or if you are struggling financially, it’s best to start by determining these two things:

1)      How many billable hours a week can you work?

2)      What is an hour of your time worth to you?

When you have a clearer idea of these two variables, it’s much easier to choose services and a pricing structure that work for you.

To get started you must determine your annual expenses and how much income you want to generate a year.

Many self-employed people skip this part of their business planning. As a result, they have no real idea what they need or want to make in a year.

But this knowledge is essential to the survival of any self-employed service provider, because your annual expenses will impact how you structure your fees and services.

Step 1: Calculate Your Expenses and Income Goals

If you haven’t already, calculate your monthly expenses. When you’re done you can annualize this figure (multiply it by 12) so you have an annual income goal. Here’s a set of common expenses:

• Rent/mortgage
• Food (human and pet food)
• Utilities (land line, cell phone, gas, electric, water, garbage, cable, etc.)
• Insurance (car, home, renters, business)
• Credit cards
• Loans (student, business, etc.)
• Gifts
• Entertainment
• Personal items (clothing, shampoo, laundry)
• Office expenses (website, computer, paper, pens, etc.)
• Emergency
• Miscellaneous
• Savings

Record how much you spend in each category on a monthly basis, include any items I missed. These are your monthly expenses.

Multiply this number by 12 to calculate your annual expenses.

For simplicity’s sake, let’s imagine you calculate the above figures and it totals $1000 a month or $12,000 a year (I know, wouldn’t that be great!)

Obviously, your goal cannot be to make $12,000 a year. You have to consider taxes.

Step 2: Calculate Taxes

As a self-employed person you pay higher taxes. Employers pay half of social security taxes. When you’re self-employed you pay the extra half. This means you have to prepare for a higher tax payment than you would if you were working for an employer who pays your taxes for you.

Using our example, if you need $12,000 a year for living expenses and savings, then you need to make an annual income closer to $21,840.

Here’s how you can figure it out:

Note: The following formula assumes you’ll pay 45% in combined federal, state and social security taxes, which may or may not be accurate for your tax bracket. To create an accurate budget, work with a financial planner.

To determine how much you need to make a year, multiply your desired “take home pay” by 1.82 (this figure assumes the 45% tax total).

For instance, if you need to end up with a net of $12,000, you need to gross a minimum of $21,840 to cover taxes. To determine this fee, take your needed income, multiply it by 1.82 and you’ll have your actual salary goal:

$12,000 x 1.82 = $21,840

Once you know how much you need to generate a year you can more easily reflect on how much to charge for your services. Of course, you may want to make substantially more than what covers your expenses and monthly saving goals. Use whatever number reflects your goals.

Step 3: Determine the value of your time

To make things easier, let’s round the above salary to $22,000. To make $22,000 a year by working 960 billable hours a year, you’d need to charge a minimum $23 for every billable hour.

$22,000 / 960 = $23

(or $22,000 divided by 960 hours = $23 an hour)

In this scenario, you might say an hour of your time is worth $23.

If you want to take home $60,000, instead, you need to generate an annual income of $109,200 or

$60,000 x 1.82 = $109,200 (remember, this is an estimate)

To calculate an hourly rate you’d do this:

$109,200 / 960 = about $114

In this scenario, you might say an hour of your time is worth $114

If it were only that easy…

The truth is, it’s difficult to build a solid income by billing clients on an hourly basis. It’s a lot of work, a lot of time, and there are no guarantees.

In upcoming articles I’ll discuss alternate ways of generating income as well as how to determine the fees for your services.

For now, I encourage you to consider:

1) how many hours a week you want to work with clients

2) how much your time is worth to you

When you want to grow your small business or private practice, knowing these two variables can help you determine the best structure and fees for your services.