If you’re bringing in side hustle income, it can be tempting to spend it when you know you should save. If you really want to transform your extra income into more, it may not be enough just to sock it in a savings account, however.
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Finance experts explained the best ways to turn your extra income into more equity.
Split Side Hustle Income Into Buckets
If you’re earning side-hustle income, keep things simple by splitting each payment into four buckets, according to Shalini Dharna, CPA and owner of Dharna CPA:
- Set aside about 20% to 30% for taxes so there are no surprises later.
- Put 10% toward an emergency fund until you have three to six months of expenses.
- Use 20% to 30% to pay off high-interest debt.
- Invest the rest.
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Open a Tax-Advantaged Account
Once you have an emergency fund, don’t leave your side hustle money in a regular savings account, Dharna said, start investing it. “The easiest way to start investing is through a tax-advantaged account” such as a 401(k) or IRA.
However, if you’re focused on growth, not just retirement, Heather Parsons, founder and CEO of Summit CFO, a fractional CFO firm, said, “I’d start with a regular brokerage account. It gives you more flexibility and doesn’t lock up your money until retirement age.”
Start Small
Start with what you know and want to learn when it comes to investing, Parsons said. If you like tech, a tech fund could keep you engaged, though she called it “riskier.” If you want safer investments, broad “whole market” index funds spread out the risk.
A beginner-friendly mix could be 80% to 90% in a global or total stock market index fund and 10% to 20% in bonds or cash equivalents for stability. One or two funds is likely enough.
Reinvest In Your Business
If you want to use your side hustle funds to reinvest in the side hustle itself, Dharna said a good rule of thumb is to put enough back in to grow while also setting money aside to build wealth outside the business.
“If you have high-interest debt — generally above 6% to 7% — prioritize paying that off before investing heavily.”
Parsons said a good way to determine if you should reinvest in the business is “if you can earn more by putting money back into your side hustle … That’s usually the case for most hustlers early on.”
Once you’re hitting capacity, start diversifying into the market so your wealth grows outside the business too.
Consider Fractional Shares
Fractional shares and round-up apps can be a good way to start with small amounts but always watch for fees and hidden charges, Dharna said.
Be Careful Buying Individual Stocks
If you’re tempted to buy individual stocks, limit them to no more than 10% of your total portfolio so you stay diversified and protected, Dharna urged.
“Everyone’s situation is different, so while these are general starting points, it’s best to work with a financial advisor or tax professional who can tailor the approach to your specific goals, income and local tax rules.”
Automate Side Hustle Income
To make all of this easier, automate everything you can, Parsons urged, including paying yourself, setting aside taxes, reinvesting in the business and investing in the market. “With uneven income, moving a set percentage into buckets keeps you consistent, and consistency is what drives results.”
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This article originally appeared on GOBankingRates.com: Side Hustle to Shareholder: How To Turn Extra Income Into Equity
