Whether it is to cover your expenses or follow your passion, having an additional income source can be empowering. It’s no surprise that an increasing number of Americans are actively running side hustles to make a few extra hundred bucks, especially in the aftermath of the COVID-19 pandemic.
Although not all side-gigs can turn into a thriving side-business, you can often end up making a decent amount of money. According to a recent DollarSprout Side Hustle Survey, more than 33% of survey respondents earned $500 or more per month with their side hustle. The question is, how do you manage this extra money?
Whether you want to use this extra money to treat yourself, pay your bills, or clear off your credit card debt, you need a proper management plan. Carefully managing all your side hustle earnings will help you get the most out of your collective income. This, in turn, will help you achieve your financial goals quickly.
If you haven’t already checked out a plan to manage your side hustle income, these six tips will help.
1. Set Your Side Hustle Goals Early
Something must have prompted you to start a side hustle, be it your mounting credit card debt or exploring your entrepreneurial skills. You need to figure out why you want to invest time and money in a second gig. You can treat this reason as your side hustle financial goal.
As a trusted financial advisor in Gainesville, we recommend that you should set your financial goals as early as possible. It is necessary to set your goals early because the extra money you make will be used to fulfill these goals. For example, if you have to pay off your credit card debt, you can start managing your side hustle income accordingly.
Say, if you are making $1000 a month through your side hustle, you can pay that entire amount or part of it to repay your debt. You can talk to your credit card company or bank to restructure your debt and create a payment plan as per your side hustle income.
If your side gigs bring in more money than you expected, you can repay the debt early. Make sure to consider all these factors even before you start thinking of running a side gig.
2. Keep Track of All Your Side Hustle Incomes and Spending
You are probably tracking your primary income (and expenses) already. Likewise, you will also need to start tracking all your side gig incomes and spending. This simple step can offer several benefits, including the following.
- It can help you stick to your budget.
- You can better manage your financial goals.
- It can help you identify any spending or debt issues.
- It’ll help you eliminate impulsive spending or investments.
- You will be able to determine if the side gig is truly paying off.
- Your financial security will improve.
- You can find better ways to invest and save your additional money.
- You can also plan your taxes as per your side gig income.
The good news is tracking your side gig finances is quite simple in this digital age. You can find several expense tracking applications online. You can choose a free or paid app that suits your financial management requirements.
Alternately, you can maintain a spreadsheet for tracking your weekly or monthly income and spending. If you are computer savvy, you can create a spreadsheet yourself. If not, you can find several spreadsheet formats online for expense tracking.
If you don’t like keeping a digital record, there is always the good old pen and paper. Simply maintaining a diary will do. Just make sure never to stop tracking your income and spending.
3. Understand the Tax Implications of Your Side Hustles
As they say, the only two certainties in life are death and taxes. You will have to pay tax on your side gig income at some point. Your primary income is most likely to come from a W-2 job, where you will receive the money after the taxes get deducted.
However, whenever you work a side hustle, you will be working as a freelancer, a self-employed individual, or an independent contractor. So, you will receive payments without tax deductions. Does that mean you don’t have to pay taxes at all? Not really.
As a freelancer, a self-employed individual, or an independent contractor, it is your responsibility to track and report your income and pay appropriate taxes. In the event of substantial side gig income, you may even have to make quarterly tax payments.
You will need to know your tax bracket. Usually, you will have to set aside at least 20%-30% of your side hustle income for taxes. However, your accountant or a financial advisor can help clarify the tax liability of your side gigs more accurately.
During the DollarSprout Side Hustle Survey, 20% of survey participants (one in every five) said they received an unexpected tax bill at the end of the year. To avoid this, plan your taxes well in advance.
4. Maintain Separate Bank Account for Side Hustle
Tracking your finances, especially when you combine your primary income with your side hustle earnings, can be confusing. You don’t want to end up paying more taxes than you owe. It may adversely affect your budget.
On the other hand, if you pay fewer taxes than you owe, you may have to pay a late fee or a fine. That’s why opening a separate bank account for your side hustle can be of great help. It can offer the following unique benefits.
- You can easily track side gig earnings and spending.
- You can accurately calculate your taxes.
- You can determine whether or not a side gig is worth investing your energy and time.
- You can track payments received from different clients, making it easier to follow them up.
5. Invest the Remaining Side Gig Money Wisely
Like most Americans, you may also be working a side hustle to pay your bills, credit cards, mortgage, or a student loan. If your credit card debt or student loans are huge, you can think of making additional payments to pay off the debt quickly.
However, if you don’t have any significant debt and already managed to put aside some of your side gig money, you can start thinking about investing it. For example, you can open an Individual Retirement Account or IRA to start building a nest egg for your retirement.
Any individual can open an IRA. There is no age limit. In an IRA, you can choose from stocks, bonds, and Certificates of Deposit (CDs), among other investment options. You can do the research yourself and invest accordingly. You can also consult a professional financial advisor to help you make suitable investments.
Another option is to put aside money for real estate investment. You can also save money to treat yourself. For example, you can start saving for a vacation in the Caribbean or a new car or bike. You can set your financial goal and start putting the remaining funds aside accordingly.
6. Manage Your Side Gig Debt Carefully
Many side gigs require you to make an upfront investment. It is better if you can make this investment from your savings. You can also find a side hustle that requires no initial investment or seed money.
You should avoid taking any side hustle debt, at least in the beginning. If the gig fails to take off, you could land in financial hot waters. That’s why you will need to get your basics in place first.
Your basic market research should help you answer the following critical questions.
- How do you plan to make money?
- What skills and resources do you need to make money?
- Is there any competition? How do you plan to overcome it?
- What is the minimum investment you need to start your gig or take it to the next level?
- How much experience do you need before taking your gig to the next level?
Once you have earned enough experience running your side hustle, you can think of using debt for expansion. Make sure to use the debt in small installments to avoid putting pressure on your finances. Also, consult professional financial advisors and business consultants before signing up for any debt.
Working a side hustle is a great way to supplement your income and secure your financial future. However, you can’t reach your financial freedom without proper planning. You will need to put as much thought into managing your side hustle earnings as you did in running the gig itself.
These six tips will prove helpful in managing the extra money made from your side gigs. How do you manage your side gig income? Feel free to share your experience in the comments.