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Whether it’s through a side hustle, investments or gig work, having multiple sources of income can make your financial life more stable — but it also makes finances more complicated.
More Americans are relying on multiple streams of income not only for added financial security, but also simply to pay for everyday needs. According to Bankrate’s recent side hustle survey, 33 percent of those who have a side hustle need the extra income to cover living expenses.
Having multiple streams of income means more cash flows to keep track of, more income to account for in a budget, added tax obligations and potentially having multiple bank accounts to manage. Here are some strategies to effectively handle those responsibilities.
1. Create a comprehensive budget
Having a comprehensive budget allows you to see the total amount of money you have coming in each month and where you want to distribute it. Start by listing all your income sources and their respective amounts.
Then, identify your expenses. Keep separate categories for essential expenses, such as rent, utilities and loan payments, as well as nonessential expenses like clothing and entertainment. Consider the specific needs associated with each income stream: Maybe you need to pay for equipment for a side hustle or have costs associated with managing investments.
Finally, make sure to also allocate a portion of your income for savings, including emergency savings.
2. Streamline financial accounts
One of the first steps to take for keeping your bank accounts organized is to separate business and personal finances. Maintaining separate accounts in this regard helps you keep track of income and expenses associated with each stream, avoiding potential record-keeping errors and making it easier to pinpoint business-related expenses when tax season comes around.
Still, having multiple accounts to keep track of can be daunting. You can streamline your accounts further by linking them to a personal finance app that provides a consolidated view of all your accounts.
Apps like Mint and Empower let you track earnings, expenses and savings from each account in one dashboard. Having this comprehensive overview enhances your financial decision-making and makes it easier to regularly review transactions.
3. Automate savings and payments
Managing multiple income streams can quickly become overwhelming if you have to manually allocate funds for savings, debt and bill payments. Automating your savings and payments simplifies the process of distributing your income and helps you stay on top of financial commitments.
To automate savings, you may be able to set up regularly scheduled transfers to a savings account through online or mobile banking or in a third-party savings app. Determine a specific percentage or fixed amount that you want to save from each income source, which will be deducted from your paycheck and moved into a linked savings account.
Typically you can automate your bill payments through online banking, as well. A bill pay tab in your online banking portal will ask you to enroll and enter information about billers you want to link. That could include rent or mortgage, utility bills, loan repayments and credit card payments. Automating these payments not only saves you time, but also reduces the stress of remembering and managing multiple due dates.
4. Pay attention to taxes
Each of your income sources may have different tax implications, and it’s essential to understand the specific rules and regulations that apply to each stream.
If you have a side hustle, whether it’s part- or full-time, you’re considered self-employed and likely receive a year-end 1099-MISC income statement, which designates self-employment income.
When you file taxes for a side hustle, you’ll want to account for any business-related expenses, since these can lower how much you owe in taxes — you’re only taxed on profits made. Some common expense categories include:
- Legal and professional services
- Car/truck maintenance
Keep a meticulous record of all income and expenses throughout the year to simplify the tax preparation process. Make sure to have copies of receipts, invoices and financial statements.
Also consider the tax advantages of retirement accounts. If you contribute to a traditional IRA or 401(k), you’ll defer getting taxed and get a tax break for those contributions, though you’ll have to pay taxes on future withdrawals. With a Roth IRA, you pay taxes now, but your funds grow tax-free up until withdrawal.
To ensure compliance and maximize your tax efficiency, you might want to consult with a tax professional who can provide tailored advice based on your specific circumstances.
5. Use digital expense tracking
Tracking all your expenses in a spreadsheet, especially when accounting for expenses related to multiple income sources, can get tedious and messy. Luckily, technology can do much of that work for you, now.
With digital expense-tracking tools, you can categorize your expenses according to the income stream they belong to. In some cases, those expenses may even be automatically categorized. Plus, you’ll have a comprehensive record of all your expenses throughout the year, which will come in handy during tax season or simply to review your financial situation.
A number of budgeting apps, including Mint, come with expense-tracking tools. With Mint, users link their accounts to the app, and it tracks all purchases made against the accounts. It automatically groups expenses into categories, though users have the ability to customize and rename those categories.
Expensify is another popular expense-tracking service. It comes with a unique receipt-scanning feature — you simply take a picture of a receipt, and the app automatically logs the date, merchant and amount of the expense. The service comes with 25 free receipt scans for individuals — after that, it costs $4.99 per month.
6. Regularly assess and adjust financial goals
Having multiple income streams means your financial situation can change frequently. You may prioritize different income sources over time, have investments with fluctuating returns or take on sporadic gig work. As your income streams evolve, your financial goals and needs will, too.
Review your budget periodically to track your progress toward savings targets and debt reduction goals. As you analyze your income and expenses from each stream, you may find areas where you can optimize spending and invest more into higher-yielding income sources.
As an example, suppose you’re a freelancer who also earns passive income from investments. Initially, you may have to rely heavily on freelance work for income, but as your investment portfolio grows, you start generating more income from dividends and capital gains. With this shift in income streams, you may need to restructure your budget and financial goals, such as by saving a higher percentage of the freelance income and redirecting more investment income toward additional investments or long-term savings.
By recognizing and adapting to inevitable changes, you can make the most of your financial resources and continually build toward new goals.
Effectively managing finances with multiple income streams requires careful planning, organization and regular assessment. As your financial situation becomes more complex, digital financial management tools can step in to simplify much of the legwork of tracking expenses and managing a budget.
Remember that your financial situation with multiple income sources is dynamic. You may have to revisit your budget and financial priorities more frequently than you would with a single income stream, but doing so allows you to maximize your income potential and achieve your financial goals.