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The time value of money—an important lesson for freelancers and consultants

Let’s say you have the choice of receiving $1,000 today or $1,000 in 60 days. Which would you choose?

When we as freelancers and consultants pose the question as simply as possible, the answer is clear—take the money today!

Reason number 1 is that the client may not pay us later. He may ignore our invoice and dodge our phone calls. So if he is waving a check in our face, we grab it, of course.

But even if we are certain we will be able to collect in the future, we prefer to collect it now if we have any business savvy at all.

The reason for this preference is called the time value of money. The same amount of money is worth more now than it is later because we could invest that money today and earn interest during the time interval.

There is a mathematical formula to calculate what $1,000 received in 60 days would be worth today. (It would be less than $1,000 today.)

However, many freelancers and consultants would not actually invest the money. Instead, they would spend it to meet daily expenses.

If you wait to receive the check, you may put daily expenses on your charge cards. Because of the high interest rates, the amount lost is far higher than the investment income lost. As the charge card debt adds up, it’s easy to get ever further behind in paying off the card.

Definitely not good!

Having worked in the insurance and financial industries, I vowed always to remember the time value of money in negotiating clients’ payment terms. I figure that I am not qualified to market myself as a financially knowledgeable writer unless I understand and live by these principles. That’s why I stay on top of the money owed me and follow up when payment is more than a few days late.

Someone asked me in a comment on my previous blog post about how I implement my high financial standards. Frankly, sometimes I don’t. I have been known to recommend that you do as I say, not as I do. 

This is especially true when dealing with larger clients. Often they have predetermined terms, which I either accept or reject. Sometimes I accept, sometimes I reject.

In practice, I usually accept if I am confident that I will be paid as promised. Thirty days seems to be most common with medium- to larger-sized companies.

However, when writing a proposal, I start with more desirable terms.

Seems to me we all have to make our own decisions about what and how to charge. Furthermore, we are under no obligation to bill every client at the same rate and on the same terms. Relevant variables include the nature of the assignment, the timeframe, whether the result will look good in our work portfolio, and how much the work appeals to us.

Still, I strive to obtain beneficial payment terms and I urge you to do the same.

http://www.investopedia.com/articles/03/082703.asp

Originally posted 7-7-14

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