Kali Hawlk

Financial Writer & Digital Marketer

What Should You Do with Side Hustle Income?

Welcome back to the Side Hustle Shuffle series. In past posts, we’ve talked about getting started, picking up paying clients (with little to no experience), and finding success with a few simple things. Today, let’s look at what happens after you get the ball rolling and examine what you should actually do with your side hustle income.

Congratulations! You overcame the hardest step in the process to starting a side hustle: you started. Once you land one or two paying clients, the momentum builds if you continue to be driven and dedicated to your hustle.

A quick word on “momentum” before we go any further:  everyone’s momentum looks different. Keep this in mind.

Momentum for you might mean hitting a certain earnings mark per month. Momentum to someone else may mean cultivating a stellar reputation. Others may find their own momentum is simply building real confidence – so they no longer need to fake it (because they’ve made it).

Regardless of what your personal definition of momentum is, you’ll likely be carried along by it as you gain side hustle experience. And if you’re doing any level of work on the side, you’ll also be bringing in some level of extra income.

This is your next challenge in building your side hustle: making good financial decisions and putting that extra money to good use.

The Number-One Thing Everyone Should Do with Side Hustle Income

I believe there’s a reason personal finance is personal. Everyone’s income level, priorities, and life are all wildly different; most of the time it’s hard to establish concrete, blanket rules that apply to every single person involved.

However, in this case, I do think there is one action anyone who is bringing in extra income via their side hustle should do.

And it’s because we don’t really have a choice here.

You gotta pay taxes.

Sorry! I know that’s not what anyone wants to hear, but the fact is the IRS expects you to report all sources of income. Even if you think you didn’t make enough to owe anything on, the IRS wants to know about it.

Expect to report your income and possibly pay taxes on your earnings.

The safest way to handle your tax obligation is to earmark a percentage of your earnings. For example, if I earn $100 from a gig, I might say I need to set aside 25% for taxes.

Even if  you feel confident that you won’t have to pay taxes, this is still a smart habit to get into. It’s tempting to use every last cent of your side hustle income to further your financial goals – but it’s wise to leave a percentage of your income in the account where you’re stashing your earnings.

Why? Let’s say you saved up 25% of everything you made – but then didn’t have to pay taxes (or at least, not 25%). You’ve still done yourself a favor because you’ve created a fund of cash that you can then use to invest in equipment, training, or marketing efforts for your side hustle.

Investing in yourself – and your hustle – will only get you further along the road to success.

Make Things Easier by Keeping Records

Keeping track of your earnings and determining what needs to go where will be much easier if you record all information regarding your income.

How you do this is up to you – the important part is finding a system that works, makes sense, and is easy for you to maintain.

Here’s a quick rundown of how I handle keeping track of my side hustle income:

  • I use Excel spreadsheets to track earnings, expenses, and a big-picture overview of side hustle finances.
  • Whenever I am owed payment for a job, I record this on my earnings sheet – but I put a note with it indicating payment is due, and it’s not actually in the bank yet (this provides me a place to look, at a glance, what gigs owe money for work completed).
  • When I receive a payment, I record the gross total, then I take out a percentage for taxes and a percentage for savings. If I used a service that charges me a fee to collect a payment (think PayPal) or incurred another expense, I record that as well. Then I subtract taxes, savings, and fees and I record my net earnings.
  • Everything goes into a checking account that is separate from all my other accounts. It’s important that you keep side hustle earnings apart from day job earnings! This makes everything much easier to keep up with.

For me, it’s easier to go through my process of calculating percentages for taxes and savings and reaching a net number with every single payment I receive – but you might find it more time efficient to take your entire total earnings for the month and divvy things up from there.

And remember: keep all receipts and proof of business expenses if you want to take deductions on your taxes.

Get to Work on Financial Goals

Now that you’ve taken care of the tedious parts of what to do with your side hustle income, it’s time to get to the good stuff, the reason most of us side hustle in the first place: to fast-track our progress toward big financial goals!

What you do with your side hustle income is a completely personal decision once you account for taxes (and once you know what you actually have to work with, after keeping careful records of your earnings).

However, some financial goals are a little more straightforward than others. If you’re working on repaying student loans or credit card debt, you need to up your monthly payment amount. Same goes for paying off your mortgage early: take your extra money from your side hustle and make larger payments on your principle amount.

But what if you want to up your savings? Increase contributions to retirement? These goals come with a myriad of options for accomplishing them.

What’s the best way to use your side hustle income to reach these kinds of financial goals?

Reaching Savings Goals with Side Hustle Income

Need some suggestions for getting the most of your side hustle income to reach savings goals? Depending on what you’re working toward, you may want to consider…

Establishing Emergency Savings: Don’t have a rainy day fund? This is your top savings priority. Stash all your extra money earned from side hustles into a high-yield savings account. Look to your local credit unions or online banks to get the best rates.

The same goes for other goals like saving up for a wedding, a home, or big purchase (personally, I need to save for LASIK; I’m blind as a bat without my contacts). Transfer your money into a high-yield savings account, or depending on how flexible you are with keeping things liquid, try a money market account with a place like Vanguard.

Opening a SEP IRA: If you’re looking to boost retirement savings, you can’t go wrong with a SEP IRA. SEPs, or Simplified Employee Pensions, are individual retirement accounts designed for self-employed individuals.

The cool thing about a SEP is that you don’t have to be full-time self-employed to take advantage of having one of these accounts. As long as you have some sort of self-employed income — think income that you had to submit a W2 to earn and receive a 1099 for come tax time — you can open a SEP IRA.

Be sure to consult with a financial professional first. A trusted planner who works with you as your fiduciary can help you determine when is the right time to open a SEP IRA.

(You can read more about SEPs here.)

Maxing Out Your Roth IRA: If you decide a SEP IRA isn’t the best decision for you, a Roth IRA is always an awesome alternate. Use your side hustle income to max out this account if you’re not doing so already. If you’re having trouble maxing out the Roth IRA, consider a traditional IRA. This is the tax-deferred version, and if you can contribute more because you know you’ll save on taxes, this might be a better option.

Investing in Other Areas: Use your side hustle income to invest outside of retirement accounts to grow wealth. Could you invest in real estate, start another business, or even invest in yourself?

While this may not be a savings goal — not exactly — it’s still a worthy use of side hustle income. Again, it’s all about growing your wealth. Keep this in mind when thinking of the best use for your extra earnings.

What do you want to do with your side hustle income? Do you have any questions about using your side hustle income, that weren’t addressed here? Please feel free to ask away – I look forward to your comments and input!

31 Comments

  1. THANK YOU!!!

    I’ve only recently gotten my first side hustle gigs and had SO MANY questions about the record-keeping part – and you addressed ALL OF THEM. (I found it very strange that this information was so hard to find! I had to piece it together from several sources.)

    Do you suggest opening a separate bank account right away? Or should I reach a certain threshold before I worry about this?

    • I do suggest opening a separate account as soon as you possibly can. A basic checking account is all you need; don’t feel obligated to get a “business” account. The only thing to be careful of is to make sure you have enough funds to keep in there to avoid getting hit with service or maintenance charges. At Wells Fargo, for example, a basic checking account is “free” as long as you have $1500 or more for your balance.

      This isn’t necessarily a BAD thing — that $1500 can serve as your side hustle emergency fund, so to speak — but it is something to be aware of and keep an eye on if you don’t already have that cash in reserve and don’t want to pay a fee to the bank.

      (PS — I still want to go into more on your questions that you had asked on an earlier post. Please consider this your “short” answer for now, but I do believe a full post should be dedicated to administrative, back-office type issues that side hustlers need to be aware of and think about!)

  2. Excellent list Kali! Forgetting to put money aside for taxes is a mistake I see a lot of self employed people make. This is especially important because of Self Employment tax being 15% . I need to look into an SEP IRA, that is one segment of retirement planning I haven’t researched.

    • Thanks John! I agree, failing to set money aside from taxes is a very common mistake. It’s much easier to set that money aside as soon as you get it rather than trying to scramble to get it together come tax time, when you end up owing!

      I really like the SEP IRA for its flexibility. A Solo 401(k) might allow you to put away more, however — I would look into both options.

      If you need a financial planner to help you, I would go to Sophia Bera at Gen Y Planning (http://genyplanning.com). She offers “quick start sessions” where she’ll work with you on just those one or two big questions you might have on the subject; no comprehensive package purchase required.

  3. This is fantastic! I like what you said about momentum. For me, it’s about finding my confidence and increasing earnings over time. I love your helpful tips regarding logistics. I need to get my records in order! I track all my income, but it’s not very organized.

    • Keeping organized is definitely worth the time it takes to do it. I think it will actually probably save you time in the long run — like when it’s time to pay taxes throughout the year or file in April!

  4. Love this post! Lots of useful information as always. Taxes are my biggest concern. While it’s nice to say I earned X amount this month, I know I can’t keep all of it! For right now, my goal is to cover my expenses with the income I’m making. I already have my emergency fund set up, which is a big relief.

    As a side note: Is it sad to say I am way too scared to consider LASIK? I can’t see without my contacts/glasses either, but after having read first-hand accounts of the procedure, I’m not sure I could do it. I know they give you something to relax, but it makes me cringe just thinking about it. On the other hand, being able to wake up and see without reaching to find my glasses would be awesome.

    • Thanks E.M.! I know taxes irritate me and stress me out — that should probably be the next post in this series :)

      Totally not sad that you’re a little scared of LASIK.. I am too! It completely freaks me out but like you said, it would be so awesome to be able to just wake up and see. I think eventually that feeling will win out over my fear. But probably not anytime soon!

  5. I’m not a side-hustler – I feel like a total anomaly in the PF community! – but I did just use my very small blog income through affiliate referrals to reach my emergency fund goals. I feel like this is a semi-grey zone. Is that actually income? I mean… it’s a bonus from the bank directly deposited into my chequing account. If it was just one or two I would absolutely say no, but the frequency of it makes it a decent chunk of change (over $500 and counting) which starts to make it feel real rather than $25 each time.

    Sorry, I’m thinking out loud :)

    • That’s fantastic! Congrats on using your blogging revenue to hit such an important goal :) I’ve finally settled on putting a bit of advertising up in my sidebar, and I’m still debating whether or not I should do more. That’s great to know that you’ve had success with affiliate referrals!

  6. 25% is a good rule of thumb. I treat my side hustle income as my normal income because I’m a freelancer.

    • That makes sense, Tonya! I’ve been thinking about that a lot since I put in my notice at my 9 to 5 job.. what will my side hustle be now that my side hustle is just my hustle-hustle? Lol. I need to take tips from you! :)

  7. I keep track of everything. Having a record makes everything easier. As for where to spend, I like to breakdown all income the same way, by percentages. That way everything gets funded- retirement savings goals AND fun:)

    • Agreed, Stefanie! Glad I’m not the only one who successfully divvies up income via percentages — I feel like it’s the most sensible way to go when it varies from month to month.

  8. Our side hustle income isn’t large enough so that I want to assimilate it into our budget each month (well, also we’re not working on time-sensitive goals like debt repayment). I only brought our 2013 blog income over to our personal accounts when I paid the taxes on it in April 2014. Keeping that money sequestered made the tracking and tax issues very easy.

    I hope to be earning more in the fall so I will have to update my system to be more similar to what you outlined above, including opening some kind of SE retirement savings account.

    • It’s definitely smart to keep side hustle income very separate from a normal monthly budget (in my opinion). That’s just another way to remind yourself it’s extra money and should be used smartly!

  9. these are great ways to use your side hustle income! I used mine to pay off debt, and now we’re using it to save up for our next car.

  10. These are great tips, thanks Kali!

    Keeping records of everything and of course, TAXES, totally stresses me out. It’s taken me some time to remember to do both of those but I think I’ve finally got it :)

    • I’m with you — taxes stress me out! But they’re part of life, so might as well adjust accordingly. That’s my thinking anyway, although it doesn’t make me any happier about it :P

  11. Some really great info there, Kali, especially on taxes. We all have to do our part! We treat our side income (from renting out a room) like we do with all our other income, and just plop it into the spreadsheet along with our paychecks. From that big bucket, we apply it to our monthly goals.

    • Thank you! I agree, we do have to do our part (and I keep trying to tell myself it’s a GOOD thing I owe — means I’m fortunate enough to be making enough money to do so). I think putting everything together makes sense when you have great money management habits in place and when the side income is fairly predictable. I know that I’d have a hard time putting side income where it needed to go if it was just hanging out in my checking account, waiting to be spent!

  12. I do the 25% thing, too! Lately we’ve been putting most of it into a summer savings account for those months when our regular income goes down, but we’ve allocated it different ways over the years.

    • That’s a smart use of side income, for sure! I started out doing 25%, but because I get paranoid about taxes I actually upped it to 30%. It frustrates me to no end when I owe, so I’d rather just account for a teensy bit extra ahead of time and not worry about it.

  13. I’m never sure what to do with my side hustle money, I’ve used it for buying appliances for our new home, buying event tickets for going out with my wife, paying off debt, I’m all over the place. I’m currently leaving the money in the account while I figure out what I want to do, most likely paying off debt.

    • It’s definitely good to have a plan. Using side income for a little bit of fun spending is alright — always good to reward yourself a bit for hard work! — but I definitely think you should take advantage of having “extra” money to further big financial goals.

  14. After paying the taxes, I’d pay the debt as soon as possible. Then save. I’d not splurge on the money, even if it’s quite tempting. Once you solve your ‘problems’, everything will be easier.

    • Agreed, Dojo! It is tempting to spend, especially when you know it’s additional money, but it’s so much more satisfying to invest it :)

  15. Kali! You’re so smart :)

    Spread that word of paying yourself (well… paying your taxes) first, girl! Rock solid info as usual.

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