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Dangers of Earning Extra Money

taxes, lifestyle inflation, and extra time

 

 

 

When searching for ways to pay of debt, build an emergency fund, or save for a major purchase, anyone will tell you that earning extra money is the fastest way to accomplish those goals. Increasing my income was one of the ways we were able to pay off massive credit card debt a few years ago. While the overall benefits more than outweigh any potential negatives, there are a few dangers to look out for when making extra money. Hopefully you can avoid those  pitfalls to make sure that all extra income is serving its purpose.

Taxes

Unless you take on a traditional job for extra money, income earned from side hustles is usually paid without any tax withholdings. That means that you’re responsible for Medicare, Social Security, and income taxes. It might be tempting to go ahead and use your new found money right away, but remember that a tax bill is coming up.

If you’re new at earning extra income, you should save about 30 percent for taxes. After the first year, if you continue to pull in side income, you’ll need to set up estimated quarterly payments to Uncle Sam and to your state if it levies income tax. Another way to combat tax surprises is to increase withholding from a traditional W2 job. Either way, make sure you don’t forget about taxes, and don’t be afraid to consult an accountant if you need help. Calling the IRS to straighten out problems is no fun!

Lifestyle Inflation

Making all the extra money in the world does not good if you increase your spending levels to match. Most people in my real world life have no idea what it means to earn money from side hustles. I sought out advice from a friend recently about my job dilemma, and she was shocked when I told her that I made several thousand dollars per year online. She was also blown away that I saved every penny to cover our home and rental property taxes and insurance and that anything leftover went to retirement. My friend is a very frugal person, but she said what most people probably would say about having extra money,

“Don’t you want to go an a shopping spree?”

The honest answer is yes. Sometimes I do want to go on a shopping spree, but that would defeat the purpose of my efforts. A new shirt or shoes is not something that’s going to allow me to stop working by age 50. I do shop, but it’s almost never with my side income. It’s too valuable to spend on things that don’t help reach my ultimate goal.

Spending Too Much Time on Side Hustles

I think many of us who side hustle have been guilty of spending too much time on our pursuits. Unlike traditional jobs where you show up for a number of hours and get paid a set amount, side income potential is only limited by the amount of time you are willing to spend.

I don’t know the best way to avoid this danger other than to try and set boundaries and spend some time each day on yourself and those who are important to you. All work and no play might mean more income, but at what cost?

Best Ways to Avoid The Dangers of Extra Money

After you’ve saved 30 percent for taxes, give your money a purpose. It’s much harder to spend a dollar knowing that you’re taking away from your early retirement fund or get of debt race.

Take the rest of your extra money and put it some place out of reach. Since our extra money goes toward housing and rental expenses, it gets deposited directly into an online savings account. It’s at a different bank than my bill pay account and takes two to three days to transfer. Not being able to access it easily keeps me from reckless spending.

You can also invest side income right away. Whether you put in into an IRA, solo 401(k), or use it for trading on stocks, sending extra money into investments keeps it from being spent mindlessly.

Likewise, if you are earning money to pay off debt, make your payment as soon as you get paid. Don’t leave money sitting around as a temptation.

Earning side income is a sure way to get out of debt and increase wealth, but it does come with a few potential downfalls. Remember to save, spend mindfully, and make the best use of your time in order to avoid the dangers of making extra money.

Do you think there are any potential negatives from earning side income? How do you know when to slow down and stop working on side hustles?

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About Kim Parr

Kim Parr is a private practice optometrist, freelance writer, and personal financial blogger. You can follow her journey to 20/20 financial vision at Eyes on the Dollar.

7 comments

  1. I think you have to find the right balance. If you are really focused on getting out of debt, you may want to hustle more and then slow down once you’ve reached your debt payoff goal.

  2. Jon @ Money Smart Guides

    I think the biggest negative is the taxes – the fact that you have to pay the taxes, they aren’t taken from you like they are with a typical job. Luckily my side income started slowly so I didn’t ow a huge amount come tax time. Now that I earn more, I make sure I put money aside specifically for taxes so that I have the money available.

  3. I think the benefits far outweigh the risks or downsides. My body/mind usually knows when I’m doing too much and it’s time to cut back.

  4. Like Tonya said, I think the benefits outweigh the downside – especially if you’ve got your head on straight financially speaking. That being said, I still hate taxes. 🙂 We get similar responses from some of our friends here – they just don’t understand earning money online or having a side hustle. Not that there’s anything wrong with that by any means, just shows the change in culture I think.

  5. “Don’t leave money sitting around as a temptation.” Couldn’t agree more, if you have money sitting idle it will get used on stuff you probably don’t need.

  6. The biggest issue for me with earning extra money is getting run down because I have a habit of taking on a number of projects and commitments and working them hard until I literally can’t get out of bed some days. I am getting better of knowing my limits and balancing the busy times with down times, but I’m not always successful at it.

  7. Great reminder Kim. This is my first year of making significant-ish side income, and I just put it in my emergency fund account because I’m worried about the taxes. But in the end, it is a good problem to have.

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