Reader Q&A: How Do I Manage My Side Hustle Finances?
Kierra, 33 asks...
Facing a financial dilemma? We are here to help.
Every month, we’ll answer questions from you, our readers, to help you get a better understanding of your finances.
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Today's question is from “Kierra, age 33”, and she asks:
I'm starting a start hustle for the first time and I was wondering, whats the best way to track side hustle finances?
It’s great that you are thinking ahead as it’s really important to have a handle on your business finances so you can manage costs and maximize profitability. Here are our tips to help you step on top of your side hustle earnings.
Tips to manage your business finances
Below are vital tips you can leverage to help you track and manage your money better as a small business owner.
1. Open a business account
You’ll want to start by separating your finances from your business finances by opening a business bank account.
With a separate account, you’ll be able to keep track of your business spending because it will all be in one place. You’ll also have a holistic view of how much money your side hustle is making.
2. Review your business structure
Many people start a side hustle as sole proprietors. However, as your business grows and makes more money, consider switching to an LLC (Limited Liability Corporation) or S-Corporation.
This change in structure can ensure the clear separation of your business and personal finances. Additionally, you have more protection in the event a legal matter occurs, such as getting sued. You can also receive different tax benefits when you run your business under a new structure.
3. Get organized
Financial organization comes down to tracking your business transactions, saving financial documents, monitoring your accounts, and more. Being organized will not only help you keep track of your business finances but also help you build wealth.
To be constantly aware of what’s happening with your money, apps such as Waveapps and Quickbooks can help.
4. Work with a business accountant as needed
As a business owner, you’re probably doing everything on your own: making the product, marketing, talking with clients, etc. However, you don’t have to handle your finances alone.
Hiring a business accountant doesn’t mean you take your hands off the wheel regarding your business finances. Instead, it’s more of a partnership where you work with someone who has specific insights and qualifications related to how business finances work and who can support you with tax planning as well. You can plan frequent meetings to discuss the state of your business with them.
5. Establish business emergency savings
Just like in life, the unexpected can happen in business. Having a business emergency fund can help you cover the costs of replacing a damaged sales order, making unplanned but required purchases, and covering payroll during a slow season.
6. Open a separate account for taxes
Taxes are one of the things that surprised me the most when I started teaching English as a side hustle. Having the extra money was great, but I was hit with a big bill when taxes were due.
To avoid uncomfortable situations, start planning ahead by reviewing the IRS tax procedures for the self-employed. Also, pay close attention to which tax bracket you fall in because that will determine the percentage of taxes you’ll pay.
You can also pay your taxes quarterly if that helps to keep you more organized.
7. Create a business budget
Your business budget will help you manage your business spending and expenses. It will also support you in making financial forecasts for your business goals. A budget gives you a clear picture of your finances so you can make decisions for the future.
You can get help creating your business budget as well as spreadsheets to guide you in our free business course bundle!
8. Pay yourself a salary based on your revenue
While paying yourself first is important, you want to ensure your business is financially stable. This includes prioritizing the payment of operational costs and maintaining a detailed record of your monthly business expenditures within your budget.
Once operational costs are covered, analyze the remaining earnings for the month and distribute them according to predefined percentages. Take into account the following (the percentages are a guideline):
Business emergency fund: 10%
Estimated taxes: 20%
Profits: 10%
Reinvestments back into the business: 30%
Your salary: 30%
Remember, these percentages are just guidelines. Feel free to adjust them depending on how well your side hustle is doing.
9. Get business insurance
Business insurance can help you avoid problems such as client lawsuits and unexpected damages.
When you can, schedule a time to talk with an insurance broker to see the best insurance options for your business.
10. Avoid credit card debt in your business
Getting a business credit card may be tempting, but that small piece of plastic can cause trouble if not used wisely. If you decide to use a credit card for your business, make sure that you have a plan off the balance each month in full.
Besides, you don’t want to give extra money to a credit card company.
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For more tips and guidance as you layout your business plans including your business finances, check out our completely free business course bundle.