The advent of the gig economy and platforms, the rapid growth of the coaching industry, flexible working hours, work from home – all these make a side hustle look cool.
Even Twitter influencers are egging people on. It is almost as if you are a loser if you don't have something going on at the side. Well, maybe you are actually the smart one.
My colleague Andrew Willis, content analyst at Morningstar Canada, spoke to experts to see what they had to say.
Lessons to win your own race
- Look at both sides of the coin
- Shawn Brayman, Morningstar’s director of financial planning methodology
There are some instances when a side hustle may not be worth your while.
The first being that 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.
Check the tax aspect. If you are in the highest tax bracket, the extra income a side hustle brings may not be worth the effort.
But outcomes like these should be the exception. 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.
From a long-term financial planning standpoint, individuals almost always benefit from a side income. But since financial planning is inherently about personal circumstances, you need to assess your own tax and lifestyle factors, along with aspects of the gig itself.
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”. 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. 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.
3 investment hacks for young people
- Assign a time value
- Nicholas Hui, certified financial planner with Vave Financial Planning
There are trade-offs to any side hustle or taking additional work, with the obvious trade-off being time.
Track the total time your side hustle takes up, including the hours it takes for you to research, plan, and set up your side hustle. A simple spreadsheet could help, but 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. Assign 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.
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.
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, or a gym membership that you keep renewing but do not use. Also look for 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. 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.
Is comparison ruining your peace of mind?
- Do you really need it?
- Annie Kvick, certified financial planner with Money Coaches Canada
Ask 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?
Often, we worry 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.
8 insights on getting wealthy
- Count the trade-off
- Alexandrea Ravenelle, author and gig researcher, in an interaction with CNBC
If you’re happy with your current job and are making enough money to feel financially secure, please think about this even more carefully. Taking on the added responsibility of a side hustle can mean more stress and less personal time. Every hour that you spend working is an hour that has to come from somewhere else in your life – rest, leisure, time with family and friends.
It could impact your full-time job. You may not be allowed to be employed elsewhere due to conflict of interest, or HR policy of the company. And in doing so, you could risk getting fired. Or, you may not have the mental bandwidth or energy to do so.
For many people the side hustle grows out of a hobby they truly enjoy. Once it becomes a business, however, it can be hard to maintain the passion. The end result is not just your satisfaction, but that of the client. You’re no longer responsible for simply producing the product itself. You also now have to do all the other things that go along with the business - marketing, accounting and invoicing, which you may find far less enjoyable.
Larissa Fernand is Senior Editor at Morningstar India. You can follow her on Twitter.
