Sometimes it seems like everyone has a side hustle. Whether it’s to pursue a passion, to pay down debt, or to afford a better lifestyle, side hustles can become an important part of your financial picture. Before you start one of your own, though, there are a few things to consider to see if it makes financial sense.
HAVE A PLAN
When you’re looking at pursuing a side hustle, it’s massively important to have a plan. Even if it’s something you have already been dabbling in on the side, sitting down to make a plan can help you spot pinch point and plan around them ahead of time. You should write out what you hope to offer, how much you think you would sell those goods or services for, and how much time you think you would need to spend getting your business to the point where you could offer those goods or services to the public. Think about how you would market your business and the size of the local or global market when it comes to your industry. Do you already have some local buzz around what you’re doing that is growing your business organically? Even though it may feel like just a side hustle, you should develop a plan like you would for a full time business, especially if you aspire to have it be your full time business. The Small Business Association has a great tool on their website to help you develop a business plan. It’s worth taking a look at and drafting up an initial document, but remember that life and businesses are constantly evolving, so make sure you re-examine your priorities at least once a year.
START UP COSTS
Part of developing any business plan is understanding how much it will cost to run your business. Not only do you have regular cost like material or software programs, but you may also have some startup costs. These may range from things like buying equipment, to legal fees for incorporating your business or procuring a sales license from your municipality. These are all things that are helpful to research ahead of time. While understanding which equipment, materials, or software you need might seem second nature to you, understanding your local laws may not be. One of the biggest mistakes I see people make when starting a side hustle is not understanding what their government requires them to do to operate a business. It’s much easier to address those issues at the start of your business than to course correct later, so you may want to spend the time and a little bit of money to talk to a lawyer or a CPA to help you understand how to comply with the laws of your locality.
FACTOR IN TAXES
Speaking of compliance with local laws, when you’re trying to determine whether having a side hustle can be a lucrative source of extra income, you must factor in taxes. Depending on what goods or services you offer, your revenue might be taxable at a federal, state and local level. Your income tax rate also will vary depending on how you incorporate your business. If you operate as a sole proprietorship you will be taxed at your individual income tax rate, but if you are a corporation, you may be subject to the new 21% tax rate from 2018 onward. As a result, you should try to understand how much profit you expect to make to understand which corporate structure might work for you. Once again, speaking with a CPA can help you work through this estimation and make the optimal tax decision. On top of your income taxes, you may also be subject to local business taxes and sales and use taxes. Understanding how much these will take from your bottom line is important to understand so that you can appropriately price your offerings. Investing a little money with an accountant upfront can make a big difference in the long run.
TIME REALLY IS MONEY
“Time is money” is such a cliche turn of phrase, but when it comes to side hustles it could not be more true. Whether you’re tweaking your website, creating a new product, figuring out how to attract new customers, or keeping up with your bookkeeping, everything takes time. To make your side hustle financially rewarding, you will need to invest a lot of time doing activities that may not directly reflect themselves in your bottom line and may not be things you enjoy doing. If you’re an artist and you hate math, you can always outsource your financial bookkeeping, but that will cost you money. Starting small and keeping your focus very narrow at first will help with this issue, but when you’re trying to decide whether you want to go forward with your side hustle make sure you factor this in. Is this really how you want to spend your time? What will you have to give up to make this fit into your schedule? Are there other ways you could supplement your income, or is this what you’ve always dreamed of doing? Make sure you ask yourself the hard questions now so you’re ready for the bumps in the road when they do arise.
Written By: Lindsay Dell Cook
Lindsay Dell Cook is a CPA and founder of Budget Babble. She lives in Philadelphia with her uber supportive husband and adorable daughter. When she's not working, she enjoys spending time with her family, taking their lovable mutt for walks, or reading a good book while buried under a pile of cats.