The following article is a guest post.
Over the last five years, the gig economy has taken hold of the U.S. workforce.
Freelancers – individuals who work either part- or full-time on their own schedule doing projects and tasks for others outside the traditional employer-employee relationship – are reported to make up nearly 35% of workers, bringing in a collective $1 trillion in 2016 alone.
For part-time freelancers, their work is often in addition to a full-time employed position, creating a side hustle that brings in a notable second income stream. Working a freelance gig to earn extra money is helpful in reaching one’s financial goals. But it can be challenging to know exactly where that additional income should go.
Those with additional income from freelancing on the side should consider the following to make the most of their earnings.
Start with a Plan.
Whether you’re working your side hustle each and every day or simply picking up gigs every once in a while, it is imperative to have a plan for that income from the start.
Develop a simple financial plan on your own or with the help of a professional advisor. This allows you to gain a clear picture of what you want to accomplish in your financial life.
Is that an early retirement, being a homeowner, or speeding up the payoff of consumer debts? No matter how big or small the financial objectives, freelancers are far more likely to hit these goals when a sound, realistic plan is in place.
Focus on Debt Reduction.
If your freelancing income is in addition to traditional employment earnings and you have outstanding consumer debt, focus your energy there first.
Whether it is shorter-term debt that was used to cover a financial emergency, or credit card balances that keep accruing interest, developing a plan to reduce what you owe is a smart way to set yourself up for long-term financial success.
Most financial experts suggest starting with either the smallest debt balance or the one with the highest interest rate to kick start a debt repayment plan. Either way, paying off what’s owed to creditors ultimately frees up your extra income for other financial goals.
Don’t Forget Taxes.
Working a nine to five does not usually create complex tax headaches for employees; having a side hustle that generates additional income might.
Freelancers can do themselves a favor by planning ahead for taxes that may be owed on side hustle income. This process involves setting money aside in an account each time earnings come in. Specifically for the purpose of paying taxes at the end of the year. The general rule of thumb is that between 20 and 30% should be siphoned off to prepare for a tax bill when additional income is earned throughout the year.
Build Your Wealth
A second income stream from freelancing can make all the difference in achieving your financial goals for both the short- and long-term. Using your financial plan, determine which “bucket” you want or need to fill in order to reach specific money milestones. And then break down how much of your extra income you have available to put into each category.
Some may focus on establishing an emergency fund. While others may be in a place to save toward a down payment for a home or retirement. No matter the goal, be sure to set aside some of your side hustle income for these specific buckets to begin or continue building wealth for the future.