Recently I logged into my retirement accounts and was surprised (and pleased!) to see that I had crossed the million-dollar mark. I don’t consider myself rich. In fact, money is usually tight at the end of the month. Yet my bank account says I’m a millionaire.
How did I do this? How can other self-employed consultants become wealthy too? Reflecting on my years as an independent consultant, I’ve boiled it down to five keys to success. (Sidebar: People define success differently. To me, having a million bucks in retirement savings is only one part of my total wealth. I also have a comfortable home, I’m healthy, and I have terrific relationships with family and friends. But I digress.)
Five Steps to Becoming a Millionaire Consultant
1. Charge what you’re worth and bill directly, not as a subcontractor.
If you’re working for someone else and/or not earning a good pay rate, it’s going to be awfully hard to become a millionaire. Subcontractors to an agency or consulting firm are usually paid about 65% of what they are worth. (Most agencies and firms take a 35% fee. In other words, they’re charging the client 135% more than they are paying you.)
Let’s say last year you made $125,000 as a subcontractor. That means you gave up nearly $44,000 in income. Granted, the math is more complicated but the principle remains. Although you’d make $44,000 more, you’d have to pay more self-employment tax. On the other hand, you’d be able to take business-owner tax deductions and save more for retirement, both of which lower your taxable income. (For more about this, I recommend this 90-second video: “Friends Don’t Let Friends W-2*.”)
For more information on charging what you’re worth, see my article, “How to Figure Out Your Billing Rate.”
2. Maintain a sterling reputation to get repeat business.
For the first 10 years of my consulting practice, I had two major clients who kept hiring me for additional projects. Clearly, I was doing something right because they kept bringing me back. I was following my guiding principles as a consultant:
• Do whatever it takes to keep your word. (Relatedly, under-promise and over-deliver.)
• Make your client look good; be the wizard behind the curtain.
3. Siphon off 40% of every client payment.
As an independent consultant, cash flow is erratic. To make matters worse, I’m terrible at sticking to a budget. If I see money in my bank account, even if it’s my savings account, I get looser with my spending. Knowing this and knowing that four times a year I had to make big tax payments, I set up a “sweep account” with an online bank, not my day-to-day bank. Every time I deposited a payment from a client into my regular bank, I immediately transferred 40% to the online bank. Out of sight, out of mind. I always had the cash I needed to make my quarterly tax payments, and at the end of the tax year I usually had about $25,000 to put into my SEP-IRA. (A Simplified Employee Pension is a type of IRA for self-employed individuals or small business owners. To learn more, please read my blog post on the topic.)
4. Live within your means.
Know what’s important to you and spend your disposable income accordingly. For me it’s time with family and friends and traveling. For example, about every two years I take my daughter on an international trip. Meanwhile, I drive a 17-year-old car.
Admittedly, I was lucky to have invested early in one of the longest bull markets in history, but I wasn’t a particularly savvy investor. The bulk of my retirement is in index funds. The important thing is to invest early and with as long a horizon as possible. I started saving money in a 401(k) at my first job out of grad school, even though I was paying off student loans. While that early saving habit certainly helped me reach millionaire status, what really made the difference were the big chunks of money I saved as an independent consultant.
These are my top five critical success factors. Naturally many other things came into play, and I did lots of other things right to grow my reputation and build my consulting business. I’ve poured all that learning into the knowledge base and webinars at the Professional Independent Consultants of America, a new membership organization and ecosystem I co-founded to help independent consultants be successful.
In the meantime, I urge you to define what success means to you, then make it happen!