A typical side hustle can bring in over $500 per month, according to The Ascent. It's a nice chunk of change, but it's not the fortune many envision when they begin their new venture. It might seem as if the only way to squeeze more money out of your side hustle is to work longer or charge more, but there's another option. You just have to wait to realize your profits.
Where you keep your side hustle income matters
If you're not going to spend your side hustle income right away, you have to choose where to house it. Savings accounts are popular options because they're easy to access and many people have one already.
But money doesn't grow quickly in a savings account. Even the best have annual percentage yields (APYs) of only about 0.50% right now. If you earned $500 per month from a side hustle -- or about $6,000 per year -- and you put that money in a savings account earning a 0.50% APY, you'd earn only about $14 in interest in a year.
If you chose to invest that money, however, you could grow your savings much faster. After one year of investing $500 per month, you'd have $6,225 if you earned a 7% rate of return. After five years of contributing $500 per month, you'd have about $35,800, assuming the same average annual rate of return. And after 10 years, you'd have over $86,000, despite contributing only $60,000 of that yourself. That means about $26,000 comes from investment earnings.
It's possible you could end up with even more than this, depending on how much you earn from your side hustle, how much you invest, and how your investments perform each year. However, there are a few things you should keep in mind before opening up a brokerage account.
Is it the right decision for you?
While investing can help you turn your side hustle income into a substantial nest egg, there are a few issues with this strategy.
First, if you need your side hustle income in the next five years or so, investing it isn't wise. The stock market tends to generate strong returns over the long term, but in the short term, it can be extremely volatile. If you need to withdraw your money at a certain time and your investments happen to tank right then, you won't have any choice but to take the loss. If you plan to use your money within the next five years, you're better off choosing a safer investment, like a certificate of deposit (CD).
It's also worth noting that returns aren't guaranteed when you're investing. If you want to increase your odds of success, you have to choose smart investments. An index fund is a great option for most investors because it's affordable and provides broad diversification. Index funds tend to have strong returns as well.
You could also owe some of your money to the government. Side hustle income typically doesn't come with a traditional paycheck the government can withhold taxes from, so you must pay these taxes out of your own pocket. If you have a traditional job as well and you normally get a tax refund, your refund may be enough to offset what you owe in taxes from your side hustle. But every situation is different.
If you'd rather not worry about taxes on your side hustle income, consider stashing the money in a tax-deferred retirement account. Contributions to these accounts reduce your taxable income for the year, which means the government doesn't count it when it's calculating how much you earned this year. You do have to pay taxes on your withdrawals, but if you leave the money alone until retirement, it could be decades before you have to worry about this.
Ultimately, what you choose to do with your side hustle income is your decision. But whatever you do, make sure you understand the financial implications, in both the short and the long term. This will help you get the most out of your money and avoid unpleasant tax surprises.