Pages Menu
Categories Menu

Posted by on May 28, 2012 in Running a Business | 2 comments

Self-Employment vs. Single Employment: Can Freelancing Be a Steadier Job Than Being An Employee?

Freelancing: A Secure Form of Employment?

My freelance income distribution from 2011 -- as you can see, I had 3 clients who comprised more than half of my income, which increased my financial risk

My freelance income distribution from 2011 -- as you can see, I had 3 clients who comprised more than half of my income, which increased my financial risk

One of the facts of life that freelancers face is that we often need to deal with an unsteady cash flow. Freelancers have good times and bad times financially and our earnings reflect those situations. Most people are scared off by this unpredictability, which prevents them from even considering freelancing. (After all, your rent, student loans, and car payment will be the same every month regardless of how much you earn in that period, so shouldn’t your income also be the same every month too?) Compared to being employed by a single company and receiving a steady paycheck month after month, freelancing – at first glance – seems like the opposite of a “steady job.” However, being a freelancer can actually provide more job security than having a single employer. Here’s how…

Being Fired vs. Losing a Client

If you’re employed by a single company, your income (presumably) depends entirely on that one source. If you’re fired tomorrow, you lose your entire income (or a significant portion). If you’re a freelancer and you work on a regular basis for 20 clients each contributing 5% to your total income, if you lose a client (the equivalent to being fired from a single employer), you have only lost a small portion of your income. This scenario is certainly easier to live with and adapt to than the former.

The Key to Financial Security for Freelancers: Income Diversification

The smaller the proportion of a single client’s contribution to your total income, the less dependent you are on that income source (client). The smaller the average client contribution, the better diversified you are financially, and the more secure your income flow is. In other words, the “smaller” your average client is, the steadier your job can be as a freelancer. (Of course, this assumes that your total income is sufficient to pay for your needs and wants, which is another issue altogether.)

So How Much Diversification is Enough?

If you were to lose your biggest (highest paying) client today, would you still be able to pay your bills and other expenses sustainably? If you have a well diversified client base, the answer is probably yes. If your biggest client constitutes 50% of your total income, the answer is probably no (assuming you’re not already living significantly below your means). The general rule I try to adhere to is this: your financial situation and lifestyle should not suffer if you lose your biggest client tomorrow; you should still be able to pay all your expenses even if your largest income generator disappeared. How do you make this happen? Don’t put too many of your eggs in any one basket; don’t invest too much time or energy into any particular client if you want high job security.

But Aren’t Freelancers Risk Takers?

Freelancers are generally willing to take more risks than non-freelancers, as evidenced by their career choice. I know that risk excites and motivates me because I’m generally an optimist, as are most people when evaluating risk (called the optimism bias). Making a “safe” decision like diversifying income may seem to contradict the freelancer mindset, but even freelancers need to control risk because although we may be optimistic, it’s inevitable that something bad and unexpected will happen. (Reality checks suck.) There are certainly many risks to freelancing – especially when starting out – but freelancers need to limit risk regardless to create financial security for the future and reduce stress and anxiety in the present.

2 Comments

  1. Great points, Geoff. Your article speaks to us optimists who enjoy the excitement of running a business but equally enjoy being consistently financially rewarded for our hard work. It’s important to ride the waves of high and low times without stressing out, to keep your mind positively focused on your goals (no matter what) and to be flexible when necessary. I agree that diversifying helps to minimize the risks and at the same time allows us to keep the autonomy we enjoy as business owners.

  2. Ok diversity is good for more clients, however, you might loose a lot of time with it also: spending more time in contracts and negociation, invoicing, having to switch from one client to another… Maybe the best is to have an important big client for a bit less than 50 percent (with these anyway the risk is lower for having less work and it provides similar security as a paying job) and the rest of the time with smaller clients with whom you can be more flexible about tarif…

Trackbacks/Pingbacks

  1. The Freelancer Lifestyle: Why I Love Being Self-Employed | How to Freelance: A Guide to Being Self-Employed - [...] like, I can freely “fire” the client. Yes, I may lose a small portion of my income by doing…

Post a Reply

Your email address will not be published. Required fields are marked *