In the face of high interest rates and economic uncertainty‡, many have found themselves looking for ways to earn extra income. This has contributed to the rise of “side hustles” – second jobs that may be remote, seasonal or part-time and often associated with a person’s passions. According to a 2023 Bankrate survey‡, 39% of people report having a side hustle. Below are financial considerations to keep in mind if you already have or are interested in starting a side hustle.
The importance of financial planning with your side hustle
You may have a hobby or idea that would make a great side hustle, but it’s not always as simple as making money from the start. First, consider what your side hustle entails. For example, selling custom t-shirts. Do you have the materials on hand to support selling your product or will you need to invest in supplies to get started? Or, if you’re evaluating a part-time gig, ask yourself if you truly have the time to commit to a second job. It is wise to consider all that is needed upfront and how it will impact your current financial status and your own resources before going into this job.
You don’t want your side hustle to send you into a financial crunch. Find time to sit down and review your current bank accounts, bills, expenses and current income. This will give you a clearer picture of where you stand and what resources you have available to give to your side hustle. If your side hustle requires materials, note that this will be a recurring expense in your budget, not just a one-off. You may need to factor this into the amount you sell your product for so that you are able to make a profit.
Side hustles and taxes
Beyond your budget, you’ll also want to consider the tax implications of your side hustle. Regardless of how “official” your gig is, you will have to report all income you earn to the IRS, so be sure to check with your financial or tax professionals to ensure you aren’t taking on anything that could add to your tax burden. Consider if your newly generated income will impact your total earnings enough to affect your taxes. Also consider the self-employment tax‡ and discuss with your financial planner if you may need to pay taxes for your work quarterly vs. annually. There are different tax strategies to utilize to protect yourself, such as setting aside a set amount of income throughout the year. This is similar to how your regular job holds some money for taxes before depositing the rest into your account.
Side hustles for retirees
Maybe you are recently retired, but with a career of professional experience, you may find you still want to use those skills. Right now, there is a lot of opportunity for remote freelance or side-gig work. Some examples of these options include copywriting, data entry and even virtual administrative work. A lot of work is still being outsourced due to a more flexible work-from-home environment that became more prominent during the pandemic. However, there are limits to your income of what you can earn in retirement without being taxed. Your financial planner can help you determine what guidelines to follow.
Utilizing multiple income streams
Once you figure out the basics of your side hustle, it’s time to be strategic about your second income. Do you plan to use this money to build your savings or put towards a big purchase? Consider funneling your side hustle money into a separate account, or even a high-yield savings account or CD to make that money work even harder. The last thing you want to do is experience lifestyle creep because you think you are making more money with your side hustle than you really are.
To make a plan for your side hustle, consider working with a financial advisor who can help with your unique circumstances. A financial advisor can help you manage accounts for separate expenses, create a budget and goals specific to your gig work, and can give guidance as you experience the self-employment journey. Working with a financial team allows you to focus more on doing what you love and keep hustling.
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