Perhaps you’re looking to make use of your saved commuting hours when working from home, feeling the need to make some extra money to meet your monthly budget, or seeking a hobby that can lead to some extra cash. How can you tell whether the new endeavour is a good financial fit?
“Like so much in life, we need to look at both sides of the coin,” says Morningstar’s director of financial planning methodology, Shawn Brayman. So when does a side hustle work, and when is it not a good idea?
Brayman says there are two main instance when a side hustle may not be worth your while:
- You are preretirement and have a side income, but you do not save more. Your lifestyle may be enhanced, by a side hustle but it has no impact on your long-term financial plan.
- In some countries, there are "clawbacks" or a loss of certain government benefits, above a particular level of taxable income. If you happen to be at the cusp of higher-rate tax, for example, the extra income a side hustle brings may not be worth the effort.
“But outcomes like these should be the exception,” adds Brayman. “In the vast majority of cases, a side income can have both positive financial and psychological benefits for an investor."
The obvious benefit is that a side income might provide a greater ability to save or pay down debt while you're still working. In retirement, a side income is a common way to transition from full-time employment, while allowing you to leverage your skills and keep in touch with colleagues. "The income might enhance lifestyle or can be used to reduce the need to dip into the investment pot - both good things," adds Brayman.
From a long-term financial planning standpoint, individuals almost always benefit from a side income, he says. At the same time, financial planning is inherently about personal circumstances and this means assessing your own tax and lifestyle factors, for example, along with aspects of the gig itself.
Annie Kvick, certified financial planner with Money Coaches Canada, suggests asking yourself a few questions about the side hustle: is this something you really want to do? Will the extra money help you reach your goals? And how much of this new income is offset by costs related to the new gig?
The Price of Time
“There are trade-offs to any side hustle or taking additional work, with the obvious trade-off being time,” says Nicholas Hui, certified financial planner with Vave Financial Planning.
Hui recommends tracking the total time your side hustle takes up: “Don't forget to include the hours it takes for you to research, plan, and set up your side hustle. A simple spreadsheet could help, and there are time-tracking apps/sites that could be used.”
Once you’ve established the time commitment, consider what those hours are worth to you. Hui suggests assigning a pounds and pence value to your time. “You can come up with your own personal hourly rate and if you aren't able to make that amount in your side hustle, then it may not be worth it,” says Hui.
The basis for deciding on your minimum hourly rate could be your regular job or what others make at a similar side hustle. However, note that if your side hustle is something you love to do or a hustle that could enhance your future income prospects, it can certainly make sense to take a lower rate.
Do You Need the Gig?
Regular budget shortfalls or rising inflation can be concerning but aren’t necessarily signs of needing additional income. For example, they could be caused by forgotten or unnecessary expenses, such as old subscriptions you no longer use, and potentially offset by other assets unaccounted for.
“Sometimes people take on extra work or jump into a side hustle because they feel they need the extra money, without actually reviewing how their money fits in with their life goals,” says Hui. “Take a moment to think through whether or not you even need to make extra income. Maybe even hire a financial planner to help you understand your full financial situation.”
Kvick agrees: “Often we are worried about not having enough income, not being able to save enough towards retirement, or not having enough in retirement. Find out where you stand financially and how much you really need to earn and/or save.”
And if you’ve found yourself in a financial bind because of losses in your investment portfolio, a silver lining of a side hustle is that it can help problems in the future. Consider “risk capacity” or “capacity for loss,” Brayman says. “A good risk capacity analysis is not about ‘Can you stomach the ups and downs of the market,’ but, if markets perform worse than we expect and you need the money to support your lifestyle, will you be OK? When the income an investor needs is partially covered by defined-benefit pensions, government pensions, or a side income, it means their portfolio does not need to ‘do all the work.’
”This can increase the portfolio’s capacity for loss and, assuming you can tolerate the risk, you can take more risk in your portfolio, he says. “Whether this is used to increase lifestyle or simply increase the investor’s probability that they will achieve their goals doesn’t matter – their plan will show better outcomes.”
