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.
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!