Trying to grow your side hustle into a business? Proper budgeting and financial planning are key. Here's how to budget for your side hustle.
- About 45% of American workers have a side hustle in addition to primary employment.
- 1 in 3 side hustlers do so out of economic necessity to cover their living expenses.
- The average monthly income of a side hustler in 2019 was $1,122, up from $686 per month in 2018.
- Budgeting and financial planning is key to growing a side hustle into a full-fledged small business.
It's not uncommon, in the modern economy, for full-time workers to have some kind of "side hustle" designed to help them earn extra money in their spare time. A side hustle is any kind of independent work or project that nets additional money, sometimes regularly, sometimes sporadically. For example, your side hustle might be making and selling products on a marketplace, like Etsy, or it could be freelance writing.
Figuring out how to start a good side hustle is a task of its own that requires knowing your skills and carving out a potential market or network of clients. However, once you have a side hustle up and running, you can nurture it toward becoming a full-fledged small business. To do so, of course, you will need proper budgeting and financial planning skills. This guide will help you better understand how to craft a budget for your side hustle.
What is a side hustle?
A side hustle is any type of work that occurs outside your workplace of full-time employment that drives additional income. It can go by many names: side gig, side work, passion project and so on. A side hustle generally refers to independent "gig work," such as freelancing or ride-sharing, rather than a part-time job for another company.
Many people pursue side hustles in the modern American economy. In fact, about 45% of American workers surveyed said they maintained a side gig last year. Of that group, 1 in 3 performed work on the side of their primary employment for financial reasons, using the income to pay their routine expenses. For many, side gigs aren't just a passion project – they're a necessity.
As gig work has become more common, side hustlers have netted more money, on average. The typical side hustler made $1,122 per month from their side gigs in 2019, an increase from $686 in 2018. As the income generated from side hustles increases, so, too, does the need to manage all that money. Many side hustlers find themselves in a position to grow their side gigs into true small businesses (after all, $1,122 per month is more than $13,000 per year for part-time, often infrequent work). To transition from a side hustler into an entrepreneur, though, takes diligent planning.
The rise of the gig economy
The phenomenon known as the gig economy has led to an increase in the number of people working side hustles in addition to their full-time career. And people aren't just finding part-time work for extra cash, either; for 44% of gig workers, their side hustle is their primary source of income. Both millennials and baby boomers are the most common gig workers; millennials represent 37% of gig workers, while baby boomers account for 35% of the side hustle workforce. Gen X follows at about 28%.
The types of work that people perform in the so-called gig economy are as varied as the age of those performing the jobs. Some common side hustles include:
- Graphic designer
- Social media manager
- Ridesharing driver (think Uber or Lyft)
- Web developer
- Virtual assistant
There are many other types of work available in the freelance economy. The jobs available tend to be as varied as the general population's skill set; whatever skills you have that you can turn into a source of income is likely in demand out there somewhere. And the internet has made it easier than ever to find those who need your services.
Why is budgeting so important for a side gig?
For the side hustler who sees a future as a small business owner, setting a budget to manage the extra money freelance work generates is essential. While many side hustlers are happy to pick up whatever additional work they can handle to keep "extra cash" flowing in, budgeting your side hustle separately puts you in a stronger position to perform true financial planning.
"Budgeting side hustle income is very important, because side hustlers need to align their goals with the extra income," said Sho Sugihara, co-founder and CEO of Portify. "We find that side hustlers often don't start by viewing their side hustle income as 'play money.' However, without budgeting, the extra income can become just that."
For some side hustlers, such as freelance writers, there is little to no overhead; perhaps they need a laptop, word processing software, internet connection and a cell phone. For other side hustlers, such as an artist, raw materials that regularly need replenishing are a requirement that drive up expenses. Regardless of whether your side hustle demands regular expenses, a budget is important.
"It's important to know what money from that side hustle is going to pay for the expenses to run it, as well as to make sure you can clearly see if you're making a profit," said Emily Mahr, a business consultant and podcast host.
If you ever hope for your side hustle to evolve into a small business, then it's important to treat it like one from the outset. If you finance your side hustle with cash from your primary employment, that's fine; however, build those expenses into your side hustle's budget so you can identify the point at which your side hustle revenue covers its own expenses without subsidizing it with your primary source of income.
In other words, budgeting helps you recognize when your side hustle breaks even.
How do I make a budget for my side hustle?
So, you're ready to craft a budget for your side hustle, but you aren't sure where to start. Don't worry! If you already keep a budget for your personal finances, you know the basics. It all boils down to projected revenue versus projected expenses; the goal, naturally, is to keep your side hustle in the black.
"The fundamentals of budgeting are the same," Sugihara said. "However, a side hustle business must plan for profitability. If a freelance photographer's equipment takes six paid photo shoots to pay off, then they must be confident they can get six or more projects before fully committing to the side hustle."
Before you begin, set aside the numbers. Start with a list of essentials you need to get your side hustle up and running.
"Create a list of 'must-haves' in order to start your side hustle. Perhaps it's a logo, domain and creating your documents to get started. By creating a list of all the items you need for phase one of your side hustle, you will be able to stick to a budget," said Violette de Ayala, founder and CEO of FemCity.
These expenses often need to be covered out of pocket, before your side hustle generates any income of its own. Once your side hustle is up and running, however, you can start allocating that income to reimburse yourself and cover future expenses related to your side hustle, de Ayala said.
"Once you can get the side hustle started and a bit of money coming in, you can add those funds into your budget and tackle the next level of your side hustle investment," said de Ayala. "The method in maintaining a budget is to invest a small amount and reinvest more in your side hustle budget as you grow and develop more revenue."
While your projected revenues and expenses will be largely based on past experience, it is always wise to create a conservative budget. This means underestimating your anticipated revenues slightly and overestimating your anticipated expenses slightly. Don't massage the numbers so much that you can easily make more and spend less, but plan for cash to be a little tighter than you hope for it to be. That way, in case your side hustle performs poorly or incurs more expenses than expected, you are financially prepared to shoulder that burden. [Need accounting software to help you track your revenue and expenses? Check out our review of the best accounting software.]
Tax planning and legal considerations for a side hustle
Consider taxes an expense; you have no choice but to pay them. With every sale you make, set aside a portion of money for the taxes you will owe. Otherwise, you could end up with a big, nasty, out-of-pocket expense come tax time. It's a crucial mistake many new freelancers and side hustlers make.
"It's important to have the 'what do I need to know about taxes' conversation before you make your first sale so you can set up your pricing and budget to accommodate," said Mahr.
Keeping taxes in mind can be difficult, especially as payments start rolling in. You might be tempted to pocket the extra cash, but remember that Uncle Sam is entitled to his cut. If you sock that money away now, paying your tax bill will be painless. If you spend it, you could be on the hook for a hefty sum. Anticipate your tax liability throughout the entire year; don't think about it a month or two before Tax Day.
"Have a specific method of keeping track, such as paper budget or using software that's in-depth [enough] to handle all types of tax possibilities," Mahr said. And, she added, don't be afraid to seek help from a professional financial advisor. "Don't feel like you have to do this alone." [Read related article: Best Online Tax Software for 2020]
In addition to tax planning, there are several legal considerations that are important for aspiring side hustlers. Some of the most common include "noncompete" and "nondisclosure" agreements with your primary employers.
"Don't forget to review your employment contract before starting your side hustle," said Leonard Ang, a writer for enKo Products. "These may include stipulations that could affect what you are allowed to do outside your job."
Among the key clauses to look out for, Ang said, are the "noncompete agreement," the "nondisclosure agreement" and the "invention assignments agreement." These clauses could influence whether your side hustle violates the terms of your contract or who has ownership over the intellectual property your side hustle generates. If possible, review your employment contract with an attorney before launching your side hustle to ensure there are no conflicts.
How to know when a side hustle can become your primary job
The goal of many side hustlers is to ultimately level up their gig work into a full-time business. It can be difficult to leave behind steady pay at a stable job to strike out on your own, much like a baby bird taking its first flight from the nest, but it can be done. The important thing is timing: You have to know at which point your side hustle is financially healthy enough to support itself, as well as all your personal expenses month in and month out.
"Side hustles can become the main thing when the side hustle generates enough income to cover living costs," Sugihara said. "While we do not recommend this approach, since it leaves little wiggle room in case of emergencies, our users have told us that this is their aspiration."
Of course, to know when your side hustle will cover your costs of living (along with a bit extra for savings, presumably), a budget and financial plan are required. Without a clear window into the financial performance of your side hustle, you can't really know whether it's time to finally strike out on your own or continue supporting your side gig with income from your primary employment. The dream of many side hustlers is to be their own boss, but to successfully do so takes a detailed plan grounded in your real-world finances.
"When the risk of self-employment won't financially distress you, and you're spending more time and money on your side hustle, you may consider concentration on your side hustle full time," Ang said. "You may also reach a point wherein you care more about your side hustle than your regular job. This is because of the passion you have in it and the feeling of fulfillment you derive from it."
If you've reached this point in your side hustle, congratulations! You are prepared to graduate into the world of full-time entrepreneurship. While this is a daunting step, running your side hustle and growing your budget have already prepared you for the basics of running a business.
Now, all that's left to do is scale up, buckle down and chase new goals.