Supplemental income is money that is earned above and beyond a person’s “regular” income, which, for most people, is earned through working a job.
Supplemental income could include income earned through a side hustle, or it could include money from a regular job that is extra: bonuses, overtime pay, tips, commissions, and so forth.
For many people, supplemental income can amount to “extra” money beyond what’s needed to cover their regular expenses. And there are some smart ways to handle that extra income, which may help people reach their financial goals sooner.
What Is Supplemental Income
As noted, supplemental income is money that is earned or otherwise accumulated beyond a typical income stream, like a paycheck. That can include bonuses or tips earned while working a job, too.
Supplemental income can also be earned in the form of a commission, by accumulating dividends on investments, or even by working a second job or side hustle.
There are numerous ways to tap into supplemental income streams, though that doesn’t mean that it’s necessarily easy. You should also know that there are generally two types of supplemental income: Active, and passive.
• 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. It’s a typical job, in other words.
• 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.
For many people, a side hustle or second job is likely the quickest route to earning supplemental income. But there are government programs out there, too, that can help those in need, like the Supplemental Security Income program (SSI).
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. 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 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.That’s because those who do receive those benefits likely won’t have much room in their budget for additional spending, or the need to find ways to deploy that additional income — they’ll need it to cover their basic expenses.
Launching a Side Hustle
When choosing a side hustle or second job, it makes sense to pick one of interest to you; or, 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?
Ask yourself further questions: 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 importantly, what’s the estimated earning potential?
Having a second job or side hustle isn’t terribly uncommon these days, as many people either need the extra money to make ends meet, or are looking for ways to pad their earnings to add to their savings or investment accounts.
One benefit of side hustles that are based on passive income is that, although work typically needs done up front to establish the side hustle, it shouldn’t need ongoing active involvement. And whether you’re renting out a room in your house, monetizing a blog, or writing ebooks to earn supplemental income, it’s important to keep some things in mind as you start to see that income roll in.
Tips for Using Your Extra Income
1. First, Manage Your Income Taxes
When working for an employer, relevant income taxes are typically withdrawn from each paycheck but, with a side hustle (one that doesn’t involve working for an employer and receiving a paycheck, that is), the worker is responsible for paying federal taxes, FICA, Medicare tax, and any state and local taxes on net income.
That’s because a “hustle” or “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 the tax-filing deadline, (typically mid-April), 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.
2. Paying Off “Bad” Debt
Bad debt can be defined, in general, as debt you acquire that results in a net loss. For example, going into debt for a vacation, a big party, clothes and/or gadgets doesn’t add to your net worth. Going into debt for your education or home may gradually add to your net worth in the future.
Bad debt can also refer to loan or lines of credit with higher interest rates, and which are harder to pay off as a result. Supplemental income can be used to pay this debt down or off.
Debt management plans to pay off debt include the snowball or avalanche methods — 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.
3. Establishing an Emergency Savings Account
Another smart idea 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 for use if a financial emergency occurs. This can be a leaky roof that requires immediate attention, 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 3-6 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.
4. Saving and Investing
You could save or invest your extra money! This can include saving for personal goals, from a down payment on a house to a vacation fund, and or 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. How you save or invest that money would be up to you, but you could look at some common investment choices including stocks, bonds, mutual funds, and alternative investments, and more.
5. Enjoy Some Discretionary Spending
Once the financial “need-to” items are checked off the list, it can be okay to use some supplemental income to have fun. You could update your wardrobe, buy a new video game, take in a movie, or even go out to a nice dinner. If it’s within your budget parameters, treating yourself every now and then can be a nice thing to do.
Plus, getting a taste of the finer things may help keep you motivated to make sure your spending stays in check and that you stick to your budget going forward.
The Takeaway
Supplemental income is extra income earned beyond your primary income stream, and finding ways to drive supplemental or secondary income can help you reach your financial goals sooner. It can also help you free up some room in your budget to potentially treat yourself every now and then.
You can also put that extra money to work, by saving it and earning interest, or investing it for the future.
Ready to use extra funds to invest in your goals? It’s easy to get started when you open an Active Invest account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
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