How To Make The Most Of Your Side Hustle

Side hustles are becoming increasingly popular, and for good reason. Depending upon the survey, roughly half of all Americans have a second income stream. Whether that means driving for Uber, selling crafts on Etsy, peddling vintage camera equipment on eBay, or repairing lawnmowers around the neighborhood, a side hustle can mean extra income, a way to indulge a passion, or even a part-time business that can someday grow into a full-time one.

Whatever the motivation, the key to success is to treat a side hustle like a business, not a hobby. That includes paying attention to business licenses, basic bookkeeping, taxes, and insurance. It may seem like overkill if you’re just starting out, but building a structure and plan for your side hustle will pay many dividends down the road.

Begin At The End

It may seem counterintuitive, but the best way to build and manage your side hustle is to start with your goal(s) and work backward. Understand why you’re doing it and what you hope to accomplish.

Is this fun and a little extra income on the side, or for your own personal growth and education? Is it a financial safety net? Is it your first step towards working for yourself and creating financial freedom in every sense? Are you building a cash cushion, paying down debts, covering your everyday expenses? Are you planning to turn your side hustle into an exit strategy for your current career?

Knowing where you hope to end up can help you take the right steps along the way. Of course, there’s your plan and then your life. A small side hustle may wind up being more successful than you imagined. Conversely, you may run into insurmountable hurdles trying to get a business off the ground. But most of the time, defining your goal(s) is the best way to start.

The Three Types Of Side Hustles

Not all side hustles are created equal, and each has its benefits and drawbacks. Whether you're looking for ways to make extra money or full career shift, it's important to know the differences between them.

A true gig:

Infrequent, one-time types of events. This is the life of many amateur musicians and other performers; a sideline while the day job provides most of the income. The payoff is a little extra cash, but often the real goal is to have fun and be creative. Will your amateur magical skills lead to Penn and Teller’s private cell phone numbers? Probably not. But you can still enjoy the applause down at the Elk’s Club or the local coffee house (when we’re back to gathering again).

The “franchise” hustle:

This is when you join someone else’s network, such as Uber or Grubhub. The upside is that someone else sends you business, and you generally can work as much as you wish. You’re working for a known entity, so you don’t have to prove your credibility or explain who you are and what you’re doing. You’re not making a name for yourself or building a brand. Franchise hustles are the most popular because they’re the easiest to start and you’re earning income right away. They can be flexible and, within limits, you can choose when and how much you work. But there is a catch: generally, your upside is limited. You can make some extra cash, but don’t expect to hit it big. Making a full-time living working in the gig economy is relatively rare.

The entrepreneurial hustle:

This is true self-employment. The good news is, you’re on your own. The bad news is, you’re on your own. How much you work and earn is up to you, but there’s no safety net. Many full-time self-employment gigs have started this way. If possible, the key is to build your entrepreneurial hustle gradually, ideally while you have another income source. You’ll have to learn as you grow, avoid expensive mistakes if possible, and then launch to true independence when you are prepared financially.

Remember It’s A Side Hustle (at least at the beginning)

Don’t quit your day job, at least right away, even if you want to make this a full-time hustle. If you can, keep your full-time job when starting a side hustle, so you have a solid financial foundation you can count on. It will help finance your side hustle over time and give you the financial freedom to get your side hustle going.

Be Realistic Out Of The Gate

It’s okay to dream big — that’s the definition of entrepreneurship, after all — but let reality, not dreams, drive your initial decisions.

Gigs and side hustles don’t always pay off right away. It may take you a fair amount of time to become known, build a reputation, and get clients/customers. Understand how much time it will take to get your side hustle up and running. If possible, start small and grow into a bigger side hustle. Don’t make big decisions right away, and learn from your mistakes while they (and your side hustle) are still small.

Funding Your Side Hustle

Never take on “hustle debt,” unless you can comfortably afford it and don’t expect your side hustle to pay back your initial debt for a long time, if ever. This goes double if your side hustle involves paying someone to get your side hustle going, such as a real estate investment course with “practically guaranteed results.” There are no easy paths to riches, despite what the ads promise. Don’t make the mistake of treating an expense as an investment, unless your due diligence shows you have a good chance of building a profitable income stream.

The Better Funding Option

Bootstrapping is almost always the best way to go, and you’ll learn valuable lessons about yourself and your business sense when you begin. Make sure you know the amount of time and money it will take to get going and what impact that will have on your overall financial plan. Thinking of starting a podcast? Don’t buy the $3,000 mic set-up out of the gates. Start with the $100 mic, get up and running, and then progress from there.

Expenses And Income

The key is to watch your costs carefully. If you can, save your income for the first few weeks, so you can gauge the impact your side hustle will have on your financial plan. Reinvest some of your earnings to build your side hustle when it makes sense.

The factor many budding entrepreneurs forget is taxes. Whether you incorporate your side hustle or declare the income on your Schedule C, the federal and (in most cases) state governments will want their cut. In most cases, paying quarterly estimated taxes is the best way to avoid potential tax penalties, but talk to your accountant. Needless to say, keep receipts and other records for every expense and every dollar of income. If the IRS has questions or chooses to audit you, you’ll be glad you have them.

It’s also helpful to track every penny to determine how much profit (hopefully) you’re making. Many Doordash drivers, for example, only look at the income and forget to deduct the expenses of gas, maintenance, insurance, and wear and tear on their vehicles to get a true picture of their side hustle.

Investigate whether you need business licenses, and talk to your insurance broker/agent about insurance. If anything you use in your business is stolen or damaged, or a delivery person bringing business supplies is hurt on your property, you want to make sure you’re covered.

Make It Part Of Your Plan

No matter what your goals are for your side hustle, it’s smart to understand how it fits into your overall financial plan.

For example, let’s say you want to start a podcast to discuss your collection of old Jeeps. You can spend under $100 or a few thousand for the equipment you need to record your podcast, depending upon how professional you want the results to be.

If your podcast isn’t likely to generate revenue out of the gate, and you expect it to be a hobby that will one day pay for itself, going the less expensive route will probably be a better fit for your financial plan. But if you think you have something that Jeep fanatics will value and pay for, maybe you want something that sounds more professional and is more likely to draw paid subscribers.

Before spending money to get your side hustle up and running, evaluate how it will impact other areas of your financial plan. Will it take away from other goals? Will it mean dipping into your emergency fund? Will it affect your ability to deal with any unforeseen financial emergencies?

The goal is to minimize your financial risk and maximize the potential rewards, whether your side hustle is a way to indulge in something you’re passionate about or the first steps to financial independence.

Brent Weiss, CFP®, ChFC® is a co-founder of Facet Wealth, a virtual financial advisor that offers full-service planning from dedicated CFP® professionals for a flat annual fee.