In a previous post I spoke about why leaving your 9-5 job to be self employed was a waste of time. This post has been written to expand on a few concepts presented in that post, one namely being the restriction on your earning potential as self-employed.
We have always been taught about exchanging our time for money. Time = money. This is because we have been conditioned into a system that rewards us with a specified amount of money for the time and effort we put into a job. So as a self-employed person, working 8 hours a day means that person would receive an income equivalent to the time spent doing the job.
It’s clear how this concept works. It follows a simple formula.
Hourly Rate X Hours worked = Income
Therefore, time spent not working means there would be a loss of income.
But when you really get down to the details, you begin to realise that self-employment can be restricting your earning potential.
Let’s use the example of a private tutor that charges £20 per hour for their services. They work 8 hours a day and at the end of the day they earn £160 as compensation for their time spent doing the job.
20 X 8 = £160 per day
But let’s say the tutor has continuous work coming in for the week and they’re able to work 8 hours each day. We can now calculate their income for the work week.
(Hourly Rate X Hours Worked) X Days Worked = Income
(20 X 8) X 5 = £800 per week
Simple right? So the tutor could potentially earn £800 per week.
But let’s say for the purpose of the example that this tutor could work an extra 2 hours each day, taking it to a total of 10 hours a day.
(20 X 10) X 5 = £1000 per week
Now this tutor has increased their weekly earnings by 25% by just doing an extra 2 hours per day!
But let’s continue to push this tutor to their limit. Let’s say they can work an additional 2 days a week. So in total they’re doing 10 hours a day, 7 days a week. They’re putting more time in so that would mean more money right?
(20 X 10) X 7 = £1400 per week
The tutor has now increased their income by 40% by doing an additional 20 hours over 2 days.
We could keep pushing this tutor. Let’s say they can work 24 hours for 7 days (unrealistic but let’s go with it for the sake of the example).
(20 X 24) X 7 = £3360 per week
The tutor would have now increased their weekly income by a whopping 140% ! That’s amazing right?
Now if we extrapolate this formula and calculate their earnings for the year based on working 24/7 for £20 per hour we can see they will earn £174,720 for the year!
What a nice salary I hear you say!
However, the reality is…no one can work for 24 hours a day, 7 days a week…even if they tried.
The example above has obviously been exaggerated to show you that as a self-employed individual charging an hourly rate you are capping your earning potential. In reality we know that self-employment income can fluctuate so we should expect that the earning potentials are a lot less favourable than what you see here.
But the problem with working for an hourly rate is there is only so much you can earn in a given time. If the tutor was physically able to work every second of the day based on the £20 per hour, that tutor could only ever earn £174,720 for the year. Yes, they could increase their hourly rate, but then again there would be a cap on this too. Essentially, their maximum earning potential will always be proportionate to the hourly rate set.
But what does this mean for budding entrepreneurs? Well if you only charge an hourly rate for your service you are essentially capping your own earning potential. You’re limiting your work to the confines of time. The calculations show that you will never supersede the maximum if you work under the time=money system.
So, we (as entrepreneurs) need to become more creative and innovative with our service. We must look at ways to stretch our time further. Unfortunately, we cannot physically be in two places at once, nor can we alter time, but we can consider other methods that will open up unlimited earning potential!
Come back next week where I’ll give you tips on how you can increase your earning potential as an entrepreneur.