Having a side hustle that you enjoy can be a great way to supplement your income or explore and develop skills you don't get to use in your main job. But what happens if your side hustle seems like it's starting to really take off, or if you realize that you want to make it your career? How can you tell when it's time to take the leap?
To learn more, I spoke with Brian Walsh, a Certified Financial Planner (CFP®) at SoFi who gave me some really important pointers. Here are 12 big questions that you should ask yourself before you leave your job behind.
Depending on your personal situation, some of these factors may or may not apply to you. Always take your needs into account first before you make any big financial decisions.
1. Do you have an emergency fund that can cover 6 to 12 months of your expenses?
If you don't have an emergency fund yet and you want to leave your job, start saving now.
You won't put a year's worth of expenses in the bank overnight, so instead focus on reaching smaller goals along the way (and reward yourself when you make progress!). Saving up to $1,000 can be a great first goal on your path to a fully stocked emergency fund.
2. If you've been saving for retirement in an employer-sponsored account, how will you continue to save without it?
And while we're on the subject of retirement accounts, Brian really stressed that you shouldn't look at the money in your 401(k) or other retirement accounts as an extension of your emergency fund.
Taking money out of a retirement account before you actually retire can result in having to pay penalties and taxes on that amount. So unless it's an absolute emergency and you've run out of options, it's usually best to leave your retirement savings alone.
3. Are you following a personal budget that helps you track your income and expenses?
If you've never made a budget before, don't worry — it doesn't have to be complicated. It just has to help you make a plan for your money.
Personally, I use the Mint app to track my spending and have automatic deposits to saving and investing accounts set up on payday, so I know that I'm putting money towards my long-term goals every month. One of my best friends takes a totally different approach, with a meticulously detailed spreadsheet that she updates manually. I've seen budgets written on scraps of paper, Notes app budgets, and bullet journal budget spreads that are as cute as they are thorough. It really doesn't matter how you budget, as long as it works for you!
4. Do you have a solid business plan? What about backup plans?
But don't just plan for success. Make sure you have some contingency plans too.
"Best case, OK, you're covered off the bat, and it's going to be amazing. But then also, think about what are some things that can go wrong?" Brian advises. As the last year has shown, business (and just life in general) can be really unpredictable. Your emergency fund will be super helpful if you run into a few unexpected slow months, but it shouldn't be your only backup plan. Think about ways that you might pivot if something changes, and get ready to be flexible.
5. Are you making enough from your side hustle right now to cover your basic monthly expenses?
But don't assume that more time spent on your side hustle will always = more money.
You might be feeling like your side hustle is sooo close to becoming something big, if you only had more time to spend on it. If you're having to turn away potential clients or can't find time to work on a new product that customers are clamoring for, then this feeling could be right on. But sometimes that's just not the case. There could be other issues outside of time that are holding your business back, like perhaps your product doesn't exactly solve the problem it's supposed to, or maybe your service is only really useful to a teeny tiny niche group. Your business plan should help you get a better sense of these issues, but you can also learn a lot by sending a survey to your existing customers and really listening to their input.
6. Do you have a business bank account set up?
Once you've got an account set up, Brian recommends using your personal budget to set yourself a salary that you'll pay into your personal account every month, kinda like giving yourself a paycheck.
"That helps smooth it out because there may be months when you bring in double what you need, and that doesn't mean you should spend double," he explains. If you're happy with your current bank, you might see if you can open a business account through them to make transfers easier — most major banks offer business accounts in addition to your personal checking and savings accounts.
7. Do you know the self-employment tax rates and how to pay them?
IRS: you owe us money :( Me: how much? IRS: guess :) Me: this much? IRS: No :( Jail ;)
When you get a paycheck from an employer at a W2 job, taxes are already taken out before the money hits your account. But taxes as a self-employed person or business owner are a whole other ball game. In this case, you're responsible for making quarterly payments to the IRS to cover state and federal income tax and self-employment tax.
Tax stuff is super complicated, and mistakes can be expensive, so you're most likely going to want to see a pro.
" should certainly have an accountant." Brain says. "They can make sure your business is structured the right way, from a legal perspective and from a tax perspective."
8. Have you done a test run of working for yourself to make sure it's what you want to do?
Working for yourself can be quite challenging. You might find that it's not really for you — and that's okay.
The self-employment grass might look extremely green when you're sitting in an office with a boss you hate, but maybe on your own, you struggle with motivation, meeting deadlines, or even knowing what to work on when. It's absolutely OK to realize that you like the structure that comes with a full-time job and to choose to keep your side hustle on the side. Or perhaps you'll realize that you love your side hustle, but having to work on it every day takes the fun out of it. But on the other hand, maybe you'll discover that you thrive on this independence, and this experience will motivate you to take the next steps. Either way, a trial run can give you a better sense of what you *really* want to do.
9. Have you budgeted for the cost of health insurance?
So be sure to check out insurance rates on the healthcare.gov marketplace and factor those costs into your budget.
Just so you know, any time you have a "qualifying life event" (like leaving a job), you can shop for new coverage on the exchange. You don't have to wait for open enrollment. And if just *thinking* about health insurance is overwhelming, you might wanna check out this handy health insurance explainer.
10. Do you have any high-interest debt that you need to pay off?
"We kind of break up debt into two buckets, good debt and bad debt. Bad debt is anything with an interest rate greater than 7%, and good debt's anything with an interest rate less than that."
If you're dealing with high-interest credit card debt, you might want to check out these debt payoff tips that people swear by. And if you have multiple debts that you need to take care of, you might consider trying a debt snowball or debt avalanche to wipe them away.
11. Have you considered refinancing any high-interest loans you may have, like a private student loan?
When you refinance, the refinancing company basically pays off the original loan and sets up a new loan for you with new terms and a new interest rate.
It shouldn't cost you anything to refinance, and lowering your interest rate can actually save you a lot of money. However, you should know that to get approved for refinancing, you'll need a credit score in the "good" range and proof of a steady income. Bottom line: If refinancing sounds like a good idea to you, definitely look into it before you leave your job.
12. Finally, if you're ready to take the leap right now, have you factored summer reopenings into your plans?
And if you have federal student loans, don't forget to plan for repayment to begin again in the fall.
Federal student loan payments have been paused for over a year at this point, thanks to the CARES Act, but you still shouldn't forget about them. Unless the payment freeze is extended again, repayment will begin on September 30, so budget accordingly. Maybe think about saving some extra cash now, if you can, to help out when those payments become due again.
Now I'm curious. What's your side hustle, and would you want to take it full-time? Share your thoughts in the comments below.
And for more money tips and tricks, check out the rest of our personal finance posts.