Bonus finally hit the bank account? Flush with income from a side gig? It can be tempting to spend or splurge when an influx of cash comes in, but there may be other financial priorities worth considering when it comes to managing supplemental income.
First off, what is supplemental income? It can be defined as that which is earned above and beyond a person’s “regular” income from a job. This could include income earned through a side gig or it could include money from a regular job that is extra: bonuses, overtime pay, tips, commissions, and so forth.
Although this isn’t a comprehensive list of the types of income sources that could be considered “supplemental,” it should help to define when income could be categorized in that way.
Bonuses could be awarded to employees in response to a company’s overall performance or to one person to reward individual performance. Commissions can be based upon how much new business a person brings into a company, and these are just two examples of supplemental income that can be connected to a person’s primary job.
Another potential source of supplemental income? The side gig. There are both active and passive ways to earn income on the side:
• Active income: This is often defined as trading time for money. The person puts in time, whether that’s through taking photographs for websites or walking dogs, and is paid for their services in exchange.
• Passive income: This kind of work involves little to no active investment in time once the gig is established. It could involve selling an uploaded ebook or affiliate marketing, as two examples.
In this post, we’ll share more information about side gigs that could help someone earn supplemental income, along with tips and ideas for using their extra income, no matter how it’s earned.
A Note About Supplemental Security Income
Supplemental Security Income (SSI ) is a program administered by the Social Security Administration. SSI provides payments to people over the age of 65 who have a disability including being blind or deaf.
In addition, to qualify for Supplemental Security Income, people must also have limited financial resources, in addition to meeting the age and disability requirements. The purpose of the program is to help people meet their basic needs. As of December 2019, nearly 8.1 million people were receiving payments through the program.
This article discusses financial strategies for handling supplemental income, which could be helpful for those receiving SSI. However, as the program is designed to help people meet their basic needs, some of the suggestions for handling supplemental income may not be applicable to those earning SSI benefits.
Launching a Side Hustle
When choosing a side gig, it makes sense to pick one of interest; even better, one that inspires passion. This can help to prevent boredom and make it more likely that time and energy will continue to be invested in this income-generating activity. What hobbies, for example, can be monetized? Blogging? Making crafts or designing websites?
How much time can be invested in this side hustle? Can the required time ebb and flow as demands at the main job fluctuate? What resources are available to get started? And, perhaps most important for the purposes of this blog post’s topic, what’s the estimated earning potential?
According to a 2019 Bank Rate survey , nearly half of the people in the United States (45%) have a side hustle, and that includes 43% of full-time workers. Some people take on these side hustles to make financial ends meet, but the most common reason (34%) to have a side gig is to have disposable income.
On average, these Americans with side hustles dedicate 12 hours a week to them, with average earnings of $1,112 monthly—about $13,000 extra annually.
One benefit of side hustles that are based on passive income is that, although work typically needs done up front to establish the side gig, it shouldn’t need ongoing active involvement. Ideas can range from renting out rooms in a house through Airbnb or similar websites to wrapping a car with a company’s ad, creating an online course or ebook, and more. And, regardless of what’s chosen, that leads to the main question of this post: what are smart ways to use supplemental income? Here are some ideas.
Tips for Using Your Extra Income
1. Managing Income Taxes First
When working for an employer, relevant income taxes are typically withdrawn from each paycheck but, with a side gig, the worker is responsible for paying federal taxes, FICA, Medicare tax, and any state and local taxes on net income. That’s because a “gig” is typically a form of self-employment. To help, the IRS has created a Gig Economy Tax Center with plenty of resources and pieces of important information, including that income taxes must be paid on side gig income of $400 or more annually.
Those earning money from a side gig may also need to pay estimated quarterly taxes. The deadline for these payments are:
• April 15 for payment period January 1–March 31
• June 15 for payment period April 1–May 31
• September 15 for payment period June 1–August 31
• January 15 for payment period September 1–December 31
At tax time (typically April 15), a Schedule C usually needs to be filed for people earning money in a self-employed side gig—and, when earning supplemental income, it’s important to deposit enough in a bank account so that funds don’t fall short when tax returns need to be filed. What’s left over after taxes are planned for can be spent in a variety of ways, some ideas might include:
• Paying off bad debt.
• Establishing an emergency savings account.
• Saving and investing.
• Enjoying some discretionary spending.
Here are insights into each of these.
2. Paying Off Bad Debt
Bad debt can be defined, in general, as having interest rates higher than 7%, and supplemental income can be used to pay this debt down, and ultimately paid off.
Debt management plans to pay off this debt include the snowball method, the avalanche method—and a combo of the two, the fireball method. Different strategies work better for different people, so it can be worth experimenting with them to make the best choice.
With the snowball method, list bad debts by the amount owed, from the smallest to the highest. Include credit card debts, personal loans, and so forth. Then, make the minimum payment on each but put extra funds on the one with the smallest balance to get it paid off. Once that balance is zero, home in on the debt with the second smallest balance and keep using this strategy until all bad debt is paid off. Avoid using credit cards during this time.
With the avalanche method, list bad debt in order of its interest rate, from highest to lowest. Make minimum payments on all of them and put extra funds on the one with the highest rate. Pay it off and then move to the next highest rate, and so forth.
With the fireball method, take “bad” debt with interest rates of 7% or more and then list them from smallest to largest. Make the minimum payment on all and then put excess on the smallest of the “bad” debts. Rinse and repeat.
Once the bad debt is paid off, turn attention to the “good debt” and get that paid down, as desired.
3. Establishing an Emergency Savings Account
Another option for extra earnings is to put supplemental income into an emergency savings account. This can be accomplished in conjunction with a debt payment plan (put half of the excess funds into an emergency account and use the other half to pay down bad debt, for example) or as a single focused goal. Funds in this account are intended, as the name suggests, to use if an emergency occurs. This can be a leaky roof, a significant car repair, or unexpected medical bills. Having a robust emergency fund can help to prevent the need to rely on credit cards to address unanticipated expenses.
It is commonly suggested that emergency savings accounts should contain three to six months’ worth of expenses. So, add those monthly bills up and multiply by three—and also by four, five, and six. This gives a range of the rainy-day fund’s goal. How quickly could this goal be reached if all side gig funds went into the account? If half of it did?
Make calculations and then devise a plan.
4. Saving and Investing
This can include saving for personal goals, from a down payment on a house to a vacation fund, and from college expenses for the children to saving for retirement. What’s important is to prioritize how it makes sense to use extra money being earned and then save and invest to help meet those goals.
Which of these items of the prioritization list would be nice to have but not necessary? This could include an overseas vacation. Which is crucial to maintain your lifestyle? This could include retirement savings, with a general rule of thumb being to save 15% of income.
To build wealth, some common investment choices include stocks, bonds, mutual funds, and alternative investments, among other opportunities.
5. Enjoying Some Discretionary Spending
Once the financial “have-to” items are checked off the list, it can be okay to use some supplemental income to just have fun. Those shoes that aren’t really needed, but are so “you,” or a night out at that chic new restaurant, or a bottle of that wine that is normally too pricey for the budget—if one of those is especially appealing, splurging from time to time may be the perfect way to enjoy that supplemental security income and keep motivation high to keep earning more.
6. Investing With SoFi
With SoFi Invest®, people can get started with just $5. SoFi members can benefit from a combination of automated investing and professional human advisors, leveraging both today’s technology and the wisdom of specialist. SoFi financial advisors aren’t paid on commission. Instead, their goal is to help you create a plan that’s customized to your unique financial goals and to help keep investment strategies on track.
SoFi members can even buy fractional shares of securities for certain stocks. This may be of interest if a specific stock is appealing to an investor but the share price is more than the investor is willing to spend. These securities are listed in the Discovery section of the SoFi Invest app under the “Fractional Collection” page.
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