5 Ways You Should be Spending Your Side Hustle Money

When I first started freelance writing a few years ago, I had one goal: Pay for an unlimited PureBarre membership. I figured if I commissioned a story or two each month, I could cover the pricey classes I couldn’t afford but desperately wanted on my entry-level salary. And anything extra, I could use to chip away at my student loans. 

My plan was a success and I was able to afford classes with only a little bit of extra side hustling. But when I started seriously revving up my freelance work in 2021, I realized I was way over my head when it came to what I should do with the extra cash I didn’t necessarily need to make ends meet — and dealing with paying my own taxes on them. I did want a few nicer things that brought me joy, like those bougie workout classes, but I also didn’t want to be too frivolous in my spending.

To solve this, I tapped three financial experts about what they recommend freelancers and entrepreneurs do with their “side hustle” money. Just keep in mind that since personal finance is, well, personal, each suggestion may not entirely line up with your individual goals.

One of the most important things to remember when making any sort of side income is that your clients aren’t withholding taxes from your payments like your full-time employer does — which means you’re going to have to do it yourself. Haley Sacks, CEO and founder of Mrs. Dow Jones, recommends putting between 30 to 35 percent of your freelance income into a high-interest savings account. Depending on where you live and the city or state taxes you’re working with, you’ll have enough to cover your dues come April and will collect more interest compared to leaving it in a traditional savings account. 

“I feel like a lot of people have that shock of, ‘Oh, I have to pay taxes,’ and you don’t want that. It really makes [side hustling] less fun,” Sacks says. She also recommends separating these funds from your full-time job, just to make sure everything is a bit more organized.

“I always tell people to set up a separate bank account to funnel that side hustle finances through just so this money isn’t comingled with your nine-to-five money,” she says. “It’s nice to have different bank accounts and savings accounts for different goals and different cash flows.”

If your head is already in a tizzy thinking about tracking down 1099 forms and determining what business expenses you made throughout the year, Rachel Sanborn Lawrence, director of coaching at Ellevest, recommends investing in a tax professional for help — ideally one that understands your specific side hustle industry.

Once you know the actual money you have to work with, Lawrence recommends putting aside at least one month of your expenses, especially after so many people were affected by a grave uncertainty like the pandemic. 

“We discovered there is data that shows even if you have one month of your average reasonable expenses set aside in cash, not invested, that is earning some interest in a high-yield savings account, that can help prevent severe financial hardship,” she says.

From there, you can build an emergency fund of anywhere from three to six months of expenses, leaning towards the latter if you have more risk in your life with kids or pets, and keep it in a high-interest savings account. Lawrence even recommends having nine months of expenses saved for those who fully freelance. 

Sacks also says to “build a business emergency fund so you can keep side hustling,” meaning having savings tucked away for unexpected costs like a broken camera if you’re a photographer.

Reasonably, it’s a financially smart idea to use extra cash flow to pay off any high-interest debt, which is anything more than 10 percent, according to Lawrence. Even if you were to invest that money, you wouldn’t earn more than the interest. She recommends using the “debt avalanche” method where you pay off the highest-interest debt first. From there, you can choose to continue this method with lower-interest debt or “snowball” it by paying off the lowest amount of debt first, so you can get a quicker “win.”

Another smart money move? Investing for retirement — whether that be maxing out retirement accounts, purchasing mutual funds, or dabbling in stocks and crypto. 

But just like personal finance goals vary from person to person, your own financial goals can change with life events, according to Michelle Jackson, the host of the “Michelle Is Money Hungry” podcast. For example, if you plan to buy a home or have a wedding, some of these other savings and retirement goals can go on the back burner for a bit. “You have to constantly be evaluating your life and what your financial situation looks like,” she says. 

You should also consider reinvesting some of the side hustle money back into the hustle. That could mean getting better equipment, hiring an assistant, or even building a better website. Sacks recommends using the earnings to educate yourself on your money through courses and consulting. That way, as your hustle grows, you’re better prepared to handle more.

“If you have a good side hustle that’s doing well, I would definitely recommend investing in you.” she says. “Learn enough so you can manage it properly. It’s so important to have a system.”

“You don’t want to get lifestyle creep, which is when your income increases and then your expenses increase a lot, because then you’ll never make any progress in your finances,” Sacks says. But know that at the end of the day, it’s okay to use some hard-earned extra cash to treat yourself. 

“For some people, their side hustle money is for fun and I don’t think we talk about it enough,” Jackson says. “Sometimes people want to go to Hawaii. Sometimes people want to have a budget for a massage.”

Both Sacks and Lawrence agree that anywhere from 10 to 20 percent of your post-tax side hustle money should go to something you enjoy, whether that be barre class, a nice dinner with friends, or a bag you’ve been eyeing. That way you can hype yourself up for achieving financial goals and still enjoy life without overdoing it.