There are lots of reasons that people decide to change up their working life, either by starting a side hustle while continuing with their principal job or by stepping off the corporate ladder and going freelance in their current profession.
For some, the extra income is handy and a side hustle is framed as a monetised hobby. However, for many others, the goal of turning such a project into a principal source of income is the real dream.
You become your own boss and set your own path, answering to yourself on your own schedule.
No side hustle? No problem. Many more people are taking the plunge and leaving their jobs to go freelance in their current profession – be it design, accounting, writing, or any number of other industries.
Either way, even if you are just supplementing your income with a side hustle, there are lots of things to consider if you choose to develop it further and work for yourself. Most pressingly, what moves do you need to keep your personal finances in top condition?
A number of personal finance experts and certified financial planners gave The Independent their top tips for striking out on your own.
Prepare to live off a lean budget
Make sure you have money set aside in the bank as a cash cushion to live on, especially if going completely freelance, says Autumn Lax, CFP, financial planner at Drucker Wealth.
“If you are thinking about leaving dependable income, we recommend at least six months worth of living expenses saved in your bank account.”
Come up with a bare-bones budget in order to understand exactly what the essential expenses are that you need to run your life.
“Make it lean,” says Mark Wernig, CFP and principal at Dowling & Yahnke Wealth Advisors. “Revisit all budgets and financial plans that you have in place and run them leaner than you usually do.”
Certified financial planner Shannah Compton Game and host of the Millennial Money podcast says that it is important to know your “foundation number”.
“This is the number that you absolutely have to pay each and every month,” she explains. “Your foundation number is made up of your fixed expenses, like your rent or mortgage, car payment, credit card minimum payment, groceries, etc. Once you know this number you have an understanding of how much you need to make to cover your monthly needs.”
This is also a moment to review how much you are investing. Ms Compton Game suggests considering a pause on investments until you secure new employment in order to stay on top of your financial needs.
Keep your business and personal finances separate
This might seem an obvious piece of advice, but it is frequently overlooked in the rush to start a new venture.
“Work out how much money you’ll need to get your business started – this can require a lot of capital, so you’ll need to have a plan for where to get that and how to account for it,” says Akeiva Ellis, financial planner and educator with Ballentine Partners, and a CFP board ambassador.
“Understanding really how much it’s going to take to get things going is very important. This is just as important if it’s coming from your personal finances or from other financing methods.”
Figuring out how to separate your business finances from your personal finances is therefore important from the outset.
“You’ll be ahead of the game as it just makes things a lot easier in terms of tracking and understanding whether or not you’re profitable,” says Ms Ellis, adding that the separation must extend through all financial tools – for example, having a separate credit card for business expenses in order to make accounting easier.
She adds: “Having good data makes it a lot simpler. Establishing that system early on is very important.”
Consistently monitor expenditures
Having come up with your lean, pared-down budget, it’s important that you keep reviewing it in order to stay on top of your personal finances.
Ms Compton Game recommends this for any stage in life as a way of staying aware of your financial situation and keeping your focus on your current goals.
“I suggest creating a weekly money date with yourself or a partner if you’re in a relationship,” she says. “Set aside 20-30 minutes a week to look back at your spending from the previous week and the upcoming week. Make any changes you need in your spending and saving for that week.”
On the business side, Ms Compton Game advises: “Become intentional with your spending and focus on spending money on expenses that will help your business ultimately produce revenue.”
“Ask yourself, ‘is this expense moving me closer or further away from my business goals?’”
Focus on building your credit score to over 740, she adds, as a way of securing the best interest rates on business loans and credit cards.
Work out a plan for your taxes
This is where you may need to speak with a professional, such as a certified financial planner or accountant for more technical advice, but you will have to work out a plan for your taxes.
You will find yourself eligible for new deductions on your taxes for working out of your home – though only those ordinary and necessary for the operation of your business – but reporting your income could become much more complicated.
The IRS considers freelancers to be self-employed, and therefore taxes should be filed as a business owner. You will also have to pay a self-employment tax to cover Social Security and Medicare, which your employer would usually pay.
Enlisting the help of a professional will ensure that you don’t make any mistakes or miss out on any benefits.
Ms Compton Game advises creating a tax savings account, preferably a high-yield savings account that offers a higher interest rate. Aim to save between 20-30 per cent of your income, she says.
Remember your retirement funds and insurance
Pay attention to your retirement accounts and other benefits you might have through your current employer if you do decide to leave and go fully freelance.
Don’t leave anything on the table and make sure you have alternatives ready so you don’t lose out.
“This is something a lot of people do not pay attention to,” observes Ms Ellis at Ballentine Partners. “They leave a job and think, oh, well, I have this amount of money in their retirement plan that’s all coming with me, when that might not be the case.”
Be wary of the scheduling of your work benefits and compensation, warns Ms Lax at Drucker Wealth. “You want to be sure you aren’t on the cusp of losing out on valuable equity compensation or benefits. This is particularly important for anyone who has been granted stocks as part of their compensation.”
Ms Ellis also stresses the importance of researching your health insurance, life insurance, and disability insurance options. You may need to replace employer-provided policies with individual plans during a gap in employment.
“Research health insurance options and have something lined up ahead of time,” agrees Ms Lax.
“Knowing the budget for what it will cost to pay for these items on your own is an important consideration so costs don’t unexpectedly creep up on you!”
Temper your expectations
Prepare for the long haul and for hard work.
Julien Saunders of personal finance blog Rich and Regular, warns: “These days, there’s entirely too much focus on side hustles or freelancing becoming lucrative endeavors overnight.”
He explains: “Sometimes, you just need a few signs of viability to determine whether an opportunity is worth exploring. Simply having open lines of connection with a decision-maker or building rapport with others who are further along in that endeavor than you is enough to warrant starting.”
Having said that, he adds that even if your side hustle only brings in $6,000 a year, that is the maximum contribution for a Roth IRA – a tax-efficient individual retirement account – and so it might be worth the effort to bolster your finances.