Entrepreneurship runs in my blood, so it wasn’t difficult for me to step outside my comfort zone and take control of my income. I realize that not everyone has an entrepreneurial spirit, and that’s perfectly okay. But if you’ve ever thought about starting a side hustle, diversifying your income and creating another income stream can take your personal finances to another level.
This doesn’t mean you have to turn a side hustle into a full-fledged empire where you quit your job and 100% support yourself with business earnings. Your business can eventually grow to this point, but it doesn’t have to. Some people start a side business with hopes of replacing their full-time income, whereas others use their hustle to generate extra cash for paying off debt or saving up to buy a house.
Regardless of the driving force behind your decision, here’s what you should know before starting a side hustle.
Understand Your Employer’s Policy
If you’re thinking about a side hustle, it only makes sense to choose a business you’re familiar with, and one you’re passionate about. This can shorten the learning curve, allowing you to jump into the business quicker and earn money faster.
You have the freedom to choose any side hustle you want. But if you’re choosing a hustle that’s closely related to your day job, make sure you understand your employer’s policy about moonlighting. Depending on what you do for a living, your employer may not have a problem with your business, as long as it doesn’t affect the company.
For example, if you work as a staff writer for a newspaper or magazine, your employer may be okay with you accepting freelance work. But the company may take issue if you freelance for a direct competitor. You can also run into problems if you start contacting your employer’s customers or clients. Even if you didn’t sign a non-compete agreement with your employer, stealing clients can put your job in jeopardy.
Side Hustle Money Isn’t Free Money
You may see your side hustle as nothing more than a fun way to earn a few extra bucks every month, but the IRS may view things differently. Even if money from your hustle isn’t used for bills and it’s just “play money,” it’s still considered income depending on how much you earn. Just like any other income, you have to pay taxes on this money.
The amount you owe in taxes varies depending on how much you earn and your tax bracket. Speak with a tax accountant for additional information. A professional can estimate how much you need to set aside for taxes and provide instructions on how to pay taxes quarterly to avoid a penalty.
Also, you need to be cognizant of how much income your hustle generates. If your business takes off and you start earning a lot of money, this can potentially push you into a higher tax bracket. The upside is that you can write off expenses related to your business, which helps lower your taxable income and can keep your tax liability within an affordable range.
Don’t Quit Your Day Job Too Soon
Even if you never had intentions of quitting your job, your side business could grow to a level you never expected—to the point where you can realistically walk away from your job. But don’t make the mistake of quitting your day job too soon.
There’s a lot of uncertainty when running a business. Your income can fluctuate from week to week, month to month and year to year. Some people jump the gun and give up the security of a full-time job as soon as income from their side business is enough to pay their bills. But the reality is, if earnings from a side hustle “just” cover living expenses, then you’re not ready to quit your job.
From personal experience, I recommend quitting your job once you have at least three to six months’ income in a cash reserve, and only when income from your side hustle brings in more cash than you need. This way, if you were to lose a client or contract, you’ll be able to maintain your expenses as you look for new business.
Also, don’t forget that leaving your full-time job can also mean leaving behind certain benefits, such as paid or partially paid health insurance or a 401(k) match. You’ll have to pay these expenses out-of-pocket, so take these costs into consideration when deciding whether you can afford to quit your job.
Whether you want to supplement your income and stop living paycheck-to-paycheck, or you’re ready to stop punching a time clock, a side hustle puts you closer to your goals. But you have to know the right way to proceed.
What else should you keep in mind when starting a side hustle?