The side hustle is becoming an increasingly common trend among workers of all generations. The side hustle’s purpose is to generate income outside of the money earned through a full time job. From driving for Uber to doing freelance or contracted work for a Fortune 500 company, a majority of side hustles tend to lean towards the same end goal: increase an individual’s income. In order to get the most out of this added income, you should clearly define its purpose.
Your side hustle income should not be treated as found money. When we find money, we tend to spend it freely, using it to buy whatever unnecessary thing catches our eye. We use found money as an excuse to spend more, rather than a catalyst to save more. Side hustle money should not be treated as found money. It’s money you worked for that should now work for you.
In order to avoid the found money trap, it is important to identify and embrace one of the following clearly defined goals.
Whether it is rent, mortgage payments, or the electric bill, using your extra income to pay already existing expenses is an efficient way to allocate the money. Allocating side hustle earnings for already existing bills frees up your ordinary income to maximize contributions to your employer sponsored 401(k), if you weren’t already doing so, or to save a larger portion of your ordinary income.
Your side hustle money should not be used to live above your means. The money generated from a side hustle can come in unpredictable flows and it should not be the difference between whether or not you can afford a payment on an expensive car or a large mortgage on a new house. Long term expenses should be covered by your more stable ordinary income. If you are going to label side hustle money as disposable income, then the most important rule is to not allow the money to create a snowball of spending. In other words, do not justify the unneeded purchase of more expensive items just because you have some extra income. Imagine a scenario in which you were going to buy a $100 pair of shoes, but because of your side hustle you decide on a $200 pair of shoes instead. Apply this same thought process to dozens of different purchases over the course of the year and you may be worse off than if you never started your side hustle. Use the extra money to buy the same pair of shoes you would have bought regardless and save the additional income, you will be thanking yourself in the long run.
Use your side hustle earnings to contribute the maximum to your IRA. If you earn more than $1,000 per month with your side hustle, consider the benefits of working under an LLC or Sole Proprietorship. Under this legal title, you will be able to open a Solo 401(k). We explain the benefits and advantages to the Solo 401(k) here. If you do not fit this criteria, you can still use the income to maximize your IRA contributions.
Money from your side hustle is money you worked hard to earn and it should be treated as such. Your extra income can be used to get ahead of the curve, not wasted on superfluous luxury goods. Be disciplined with your expenses and cover already existing costs. Maximize your employer sponsored retirement benefits when you can. If you are challenged to break away from your goals, keep reminding yourself why you are working the extra hours and stay motivated to stick to your goals.