TechFI: Permanent, Contracting or Startups?

During my tech career, I’ve worked across a number of different industries and in different roles. However, the role or who I’ve been working for hasn’t made any real difference in my pursuit of financial independence. The key factor has always been the employment type that I’ve been engaged in. These have fallen into three categories, a permanent employment contract, an hourly/daily rate fixed term contractor or as a business owner. Being tactical about when to work in each of these different types of engagements can make a massive difference in achieving Financial Independence in Tech.

Permanent employee

As a permanent employee, which is how I spent the first few years of my career, I am paid a salary, I have an employment contract usually with no end date specified and tax and super contributions are automatically deducted and paid by my employer. Example permanent employee situations are:

  • A developer employed by a bank or government department;
  • An IT consultant employed by an agency who is sent to client sites to work for that agency;
  • A designer on a fixed term contract (i.e. one year) that is paid a salary and is entitled to leave and is paid via a payroll;

This is how most people working in IT are employed. Pay generally increases at a slow linear rate after annual reviews and there might be a possibility of accessing some sort of company bonus scheme once a certain pay grade is reached. While some businesses are able to give healthy pay increases to rockstar tech workers the tried and true way to bump one’s salary is simply to jump jobs every few years.

For an FI perspective being a permanent employee is a low risk and low reward option. There is very little flexibility when it comes to tax management and in most cases, the salary level is tied to ‘years of experience’ or some artificial HR structure. The usual career path means that tech staff often find themselves needing to take on management responsibilities in order to ‘progress’ their careers. Many developers and designers don’t want this stress and hence get stuck in at a midrange salary level through no fault of their own. Super/Kiwisaver contributions from the employee makes for a nice forced savings scheme but these savings aren’t available until (at least) 65 years old. All these restrictions make achieving early financial independence a difficult proposition for tech folks contemplating a traditional IT career as a permanent staffer.

However, being a permanent employee does have its benefits and, if planned and timed correctly, can be a valuable strategic move to get ahead financially. These are:

  1. It’s easy to borrow from a bank as a permanent staffer and really, really hard for contractors or business owners. If you want to buy a house or even apply for a credit card try to be in permanent employment when you do this;
  2. When having kids then there’s a bunch of obvious benefits to being in a permanent role that offers maternity/paternity leave and flexible hours;
  3. When moving overseas for work in a country that requires having a work visa it’s usually easiest to do this under a company sponsorship or job transfer arrangement;
  4. Early into a tech career, it’s a good strategic move to get some years experience under your belt with a big name company and make yourself more marketable later on;
  5. Many startups offer potentially lucrative Employee Share Schemes to early tech staff. I’ll cover this more in the business owner section;

I’ve talked more about TechFI as a permanent employment employee in another post.

Fixed Rate Contractor

This is my favored financial independence path for people in the tech industry as it offers an attractive combination of high-income potential, low risk, and excellent lifestyle options. Here are some examples:

  • A Change Manager hired through a recruitment agency at $150/hour to work on a 6-month contract at a Government Department. The agency pays the Change Manager fortnightly through a payroll company;
  • An iOS developer hired directly by a startup at $700/day to work 3 months to build some new App features. The developer issues a monthly GST invoice to the startup and is responsible for their own tax and super obligations;
  • A freelance designer who agrees to a fixed price job of $5,000 to redesign a website for a client. The designer sends an invoice to the client once the work is completed and the designer manages their own tax and super;

What makes these types of jobs attractive in the tech industry is that contract rates are generally significantly better paid than the same permanent role. In many cases, this difference is 100%. Someone earning $100/hour as a contractor might earn the equivalent of $50/hour doing the same job on a normal employment contract (even taking into account annual leave and other benefits). There’s a myth that this gap exists because contractors are more skilled then permanent employers and are taking the extra risk of having downtime to find their next contract. In reality, there is usually little or no difference in skill levels and, due to the strength of the IT employment market for the past 30 years, contractors usually get contract extensions or find their next gig prior to leaving their old contract. Big companies often hire contractors for budget reasons. The company might have a head count freeze meaning that they need to hire extra staff on a contract basis. Or maybe they just need a bunch of people to work on a new project and simply can’t hire employees fast enough.

All these variables conspire to create an interesting opportunity for a wily player to make some serious inroads towards financial independence. Obviously, all that extra money that is earned as a contractor can be plowed directly into investments. Switching from a $50/hour permanent job to a $100/hour contract (ignore tax for now) means an extra $2,000/week to invest. Keep this up for a few years and we’re suddenly looking at a very healthy early retirement bucket. Contractors can also claim back expenses related to their work. Unfortunately, tech workers don’t legitimately spend much on their jobs but we can still depreciate assets such as a computer and smartphone, claim a home office & internet and even claim travel to a conference. Contractors can also schedule holidays around tax thresholds and effectively throttle their income to smooth tax obligations across tax years. For example, assume it’s March in Australia and a Senior Project Manager has already earned $180,000 through a very lucrative contract. Any extra money the PM earns this tax year will be taxed at 45%. Now would be a great time to take a holiday and pick up another contract in July, when the tax year ends and the PM’s tax rate resets back to 0%.

Finally, contracting allows for a much more independent lifestyle. There is no need to request holidays, contractors decide this for themselves. Because contractors tend to move between jobs a lot they tend to be better networked then permanent employees, and this provides for even more contract opportunities. This extra control and flexibility make contracting well suited to Financial Independence and whilst there’s still strong demand for IT skills it makes sense to give it a try. In another post I talk in more detail about my own experiences contracting.

Business Owner

Becoming a business owner enables scaling of income beyond that of just your own labour. It has the potential of a fast track to financial independence with surprisingly low personal risk. However, the pursuit of a breakthrough startup unicorn can lead to techies being sucked into underpaid work for years while clinging onto equity in a startup that is going nowhere.

Some examples of owning a tech business are:

  • A Unity developer builds a video game in his spare time a sells it on Steam or the App Store;
  • A Project Manager working in a large organisation spots an opportunity to contract in some people to work on a project and ends up running a small consulting firm;
  • A designer and developer link up to develop a real estate software solution that helps people bid on auctions remotely. They raise money and create a startup to take the idea to market;
  • A developer is offered a 10% stake in a startup to join as CTO. While not ‘owning’ the business this equity stake could still be significant enough to enable financial independence should the startup be successful;

There are numerous other tech business owner examples and they all have very different financial risk profiles. Starting a well-managed consultancy firm usually doesn’t require a large capital investment. Since the owner will often work as a consultant for the business there is the opportunity to be paid during the startup phase. However, such a business only scales as more people are added and typically doesn’t make for an attractive acquisition/exit proposition. Medium(ish) risk. Medium(ish) reward.

On the other hand, building a successful product startup can involve many years of low pay, stress, long hours and personal financial uncertainty. It is gambling a number of years of time that could be spent contracting on being able to turn startup equity into something far more valuable. Due to this uncertainty, I don’t believe that going all in on your own Tech Startup is a valid path along the traditional financial independence road of “earn more then you spend and invest the rest“. Except in two circumstances. When just starting out of on a tech career and with little to lose then starting a tech business or taking equity in a startup might be worth a punt. Or if you’re getting close to Financial Independence then setting some money aside to give running a business a try might be a worthwhile pursuit.

I founded 3 businesses in my late 30’s, once the kids were well into high school and when I already knew that I was coasting towards Financial Independence. I made sure that I didn’t over-invest in any of the businesses and I paid myself a living wage to make sure that these endeavors didn’t derail my personal financial goals. To date, the jury is still out on whether any of these investments will pay off the money and time investment. But I can say for sure that in terms of personal development they were the best professional investments I ever made.


All three employment options, when timed tactically, can offer valid paths towards financial independence. Being in a permanent job is great when building a CV, when buying a house or when starting a family. Contracting is an excellent option to leverage sought-after tech skills and take a greater level of control over your income.  Starting a tech business makes sense for those with little to lose or those are in a financial position that allows the discretion of taking a gamble on building a startup. Timing is the key and those of us who work in tech are lucky to have these options available to us.

One thought on “TechFI: Permanent, Contracting or Startups?

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s