Friday, December 14, 2007

Contract work and the high life

Contract work can be a money trap. People get on a great project that lasts a couple months, and make good money working a lot of overtime. What I've observed is that people get used to living as if they will always be hauling in large paychecks, and then get into trouble when the project has its hours reduced or ends alltogether.

In Philadelphia, the average pay rate is around $30/hr + OT. A 50 billable-hour work week means a paycheck of $1650. Bill 60 hours and that paycheck grows to $2100. It's not biglaw pay, but its a hell of a lot more than most working Americans will ever see on their pay stub.

There's a lot one can do with that much money. You can afford the payments on a new car, take out a mortgage on a condo, or buy a lot of stuff at the mall. But what happens if the project goes to 40/hrs a week, or you get let go? Can you afford to make those mortgage and car payments? Can you pay off that credit card?

Here are my thoughts on surviving financially as a contractor:

(1) Save at least 3 months of living expenses in a Money Market Fund or Online Savings Account. It is not uncommon to go a few weeks or months without work. The extra money will tide you over if you are unable to find a new contract before your umeployment benefits end.

(2) Avoid budgeting on the assumption that overtime hours will be freely available. Obviously, there's a huge gap between $1200/week and $2100/week. Project hours can go up and down at a moment's notice. Taking out that big mortgage might not be a good idea if your pay prospects are not certain.

And if by chance you get on a great project and have lots of disposible income:

(1) Use your agency's 401(k) plan. You can contribute up to $15,500 pre-tax each year. I generally recommend investing in mutual funds with low expense ratios. Check out, CNN Money, or other websites for investment advice.

(2) Open a Roth IRA or Traditional IRA. These are two great tax advantaged savings vehicles.

Contracting work may be boring, but there are few jobs that have the potential to allow workers to generate large amounts of cash in short bursts. Invest your extra cash, and you can give yourself an excellent chance of securing a comfortable retirement several decades down the line.

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