Every once in a while, someone asks me about the numbers behind doing contract/wholesale consulting. They usually aren't asking about specific figures, but are curious about how the numbers fit together. Because there's so much information out there about how to figure out pricing on retail consulting, I figured I'd share a bit on wholesale.

First, to make the numbers easier to work with (and keep the focus on the principles instead of the actual dollar figures), let's invent a currency where you could live comfortably on 2000 of it per month. And, since this is my little invented world, we'll use the "J" as the symbol. Apply whatever exchange rate you want to it to get dollars.

So, let's say you've got a nice, comfortable job making 2000J a year and are thinking of going into contract work.

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Photo: aaronbeekay

It's entirely possible you've never heard the little scientific experiment where if you drop a frog into a pot of boiling water it jumps out, but if you put it in room temperature water and slowly turn it up, the frog boils alive. It's possible, but damned unlikely that my little summary is the first time you've ever heard that.

That's because it gets used something like 4 billion times a year as an analogy. And, today, I'm going to contribute to the problem. The thing is that it is just a good analogy. If I could come up with one that makes the point better I would. Alas, I am a flawed human being, who is falling short of his creative potential.

Enough about my character flaws and on to the point. I recently decided to see if I could financially boil myself alive in savings.
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I just got the final bill for my appendectomy and looking at it, it's clear what the real ripoff for those without insurance is: the discounted rate you get by being an insurance company.

If I had absolutely no insurance, the bill for the whole incident would have cost about $11,000.

Then you look at the next bit on the bill and see that the insurance company negotiated the cost down to $4,000, telling the hospital, doctors, etc. that *no one* was going to pay the other $7,000.

I'm on the hook for just about $2000 of it. However, it's obvious that the insurance company actually saved me more money with their giant coupon than they did in actually paying their portion.

I mean, they got me a $7000 discount and paid another $2000. Anyone who was without insurance would be completely screwed in the same situation.

Everybody seems to focus on how much the insurance pays or doesn't pay. However, if we just all had access to the discounted price list for services, that alone would make a huge difference in stopping medical bankruptcies. I mean, come on, the same service at the same hospital costing anywhere between $4,000 and $11,000, depending on who you are, specifically skewed so that the entity who has the most cash on hand pays the least and those with the least amount of cash pay the most is completely messed up.

Photo: Lucy Boynton

One of the big things I took away from Dan Gilbert's book Stumbling on Happiness is how having control over your activities is one of the main keys to happiness. Having the tiniest bit of control over their day-to-day routine was enough to keep a group of seniors in a nursing home alive. Though less dramatic, I think lots of people's experience in hobbies and their professional lives bears this trend out.

When most people pick up a hobby, it's 100% within their control. Thus, it's not surprising that those activities are enjoyable and make you happy. If you're painting, you can paint whatever you feel like. If you write short stories about vampire leprechauns driving taxicabs, there's no one to tell you you can't. And, if you want to post on your site or podcast about the sleep cycles of Bolivian gerbils, no problem. Aside from being able to afford supplies and the time to participate, hobby activities have effectively no restrictions on them.

The enjoyment of hobby activities leads lots of people to have the following thought:

"I enjoy this a lot more than my day job. Imagine how great life would be if I did this *as* my day job."

I know that this thought goes through a LOT of heads because I've had it and I've talked to lots of people who've also had it. The problem is that this is an example of where our intuition about what will make us happy usually fails.

That's because a large part of what makes our day jobs less fun than our hobbies (and what justifies us getting paid) is the fact that there's an outside constraint on the activity. That constraint can be as obvious as a boss telling you what to do or as subtle as having to cater to marketplace demands instead of your own creative whims.

Regardless, when you take a hobby and turn it into a day job, you run the risk of discovering how much joy can be drained out of the activity when paying your mortgage depends on it.

Now, I'm not saying you CAN'T turn your hobby into a day job and end up with a dream job, there's plenty of info out there on how to take a stab at that. I'd like to present a different path for building on your hobbies. It just happens to be the one I'm pursuing.

Dave Slusher has touched on this with regard to his podcast. He knows (as I do) that as a software developer who enjoys his job:

1. Even most "successful" podcasters don't make as much as software developers.
2. That he would have to stop doing it on his terms in order to make a living at the podcast.

There are many things I enjoy doing and would like to do more of. However, for example, the average published novel in the United States makes its author $3000. Why on earth would I aim to quit my profession to write novels, unless I could be certain that I would end up on the best sellers' list? And the odds of that happening for a first time novelist are *literally* the same as many lottery games.

However, all of this doesn't mean that I don't think monetizing your hobby is a bad idea. Far from it. It's just that if you shift your perspective on that monetization, you can keep 100% of the joy in your hobby and still leverage it for your long term financial goals.

Let's go back to the idea that much of our happiness comes from having the freedom to choose what we do with our time. Under that definition, "retirement" is pretty much about shifting the percentage of our time that's under our control. When we're young, most of us hand over control of about 40-50 hours per week of that time, with the rest under our control (to a point, of course). If we consider that 40 hours as having 0% under our control, then full retirement would represent 100% being under our control.

Note that I'm NOT defining retirement as "stopping working". Just as having 100% control over what you do. Consider how your day at your job might go if you knew for a fact that if they fired you, you could live exactly like you already do for 4 or 5 years without *any* job. You'd probably put up with a lot less crap, right?

To me, that's the goal of reaching retirement goals: having financial independence and freedom.

So, any and all methods of earning money for me are about either enjoying my non-working hours now or narrowing the gap between the 2 days + nights of freedom and 7 days + nights of freedom.

To that end, I've been recommending the following approach to monetizing a site or other hobby (in the United States. Adjust in rational ways outside the US):

• Take the first trickle of money and pay for your supplies: hosting, paint, film, etc.
• Take the next tier of money and put it all in an IRA. Because up to $5000 (if you're under 49 in 2008) can go in this plan, and it shelters all of that money from taxes, it's a really good way to avoid having to set up elaborate accounting to deal with your non-paycheck income. If you want the absolute minimum hassle, put *all* of the money in this direction.
  $5000 a year for 40 years at 10.5% interest (60 year average for stock market, including Great Depression), gives you $2 million.

• Do the same in an account for your spouse if they aren't taking advantage of an IRA.
• Build up your emergency fund. My appendectomy a couple of months ago is no big deal because of our emergency fund, despite high deductibles on our insurance.
• Pay off your debt. I'm aiming to be debt free except for the house by the end of 2008.

Basically, this whole approach lets you have complete control over your creative endeavors, even while you pursue monetization. However, rather than trying to squeeze $50,000+ out of your hobby, you turn the $5000 a year it might quite reasonably support (this site brings in about half of that right now from the ads) into a stable retirement. And, if you're already saving for retirement, you push the timeline closer.

I personally intend to "work" as long as I can. However, I guarantee that I'll get increasingly picky about my projects and tend more toward the stuff I feel like doing on the time tables I feel like doing as I narrow that gap. And, my creative work is furthering that.

Photo: Steve Ford Elliott

In the spring of 1998, Shelly and I got married and took a semi-local honeymoon to Duluth, MN. At the time, something more extravagant was completely out of the question. We were young and just starting out.

Of course, that didn't stop us from talking about where we would have gone if we had the money. One place we both agreed on pretty early in that conversation was Ireland. She's got Irish blood and I've just always been interested in the place. That overlap quickly settled into complete agreement and we decided we'd go for our 5 year anniversary.

Well, 2003 came and went and we've still not left the boundaries of these United States together. That's all going to change in 2008. For our *10* year anniversary, we're actually going to make the trip to Ireland. A 5% savings account has been set up specifically for vacations (the first being the Ireland trip) over at Etrade. Automatic transfers have been set up to pull money into the account on a weekly basis. There's almost $600 in the account as we speak.

By the time school lets out (and our exchange student goes home) next spring, we'll have the cash on hand to pay for the trip in its entirety and really enjoy it. That savings account is actually key to this whole thing happening. We've brought up bigger trips on several other occasions, but stayed in the country on shorter trips in part because longer and bigger trips meant tapping into the regular savings account or charging it to a credit card. Both methods were distasteful enough that we didn't go.

Having this account that's designated for travel (and is currently costing less than the cost of lunch each day) is going to provide us with nearly $3000 a year in travel money, guilt free. We're not damaging the rainy day fund, the retirement accounts or our debt load, but can go on nice trips for that kind of money.

Now we just have to figure out an actual plan for the trip from among the huge number of options when traveling to Ireland.