When it comes to personal finance, some concepts are very simple. One example is cash flow.
I’m sometimes asked: “What should I do if I’m living paycheck to paycheck and can’t seem to save money?”
There are really only two answers to this question: lower expenses or increase income. When someone is living paycheck to paycheck, they have probably already cut expenses to the minimum. This leaves one other option – increased income.
I want to stress that increasing your income is not easy. There is no shortage of noise online promising that you can make tons of money if you just buy someone’s amazing course. However, anyone promising easy results or some magical secret system is likely over-promising and possibly scamming you.
It’s also important to avoid buying into the toxic “hustle culture” that shames people into burning themselves out to try to meet some impossible expectation of what entrepreneurship should look like.
That said, starting a side hustle can be a very viable path to breaking the cycle of living paycheck to paycheck. A well-planned and intentional side hustle can make a huge difference in your cash flow and can give you the ability to start to get ahead in your finances without quitting your day job.
So how do you get started?
Choosing a Business Idea
Often the hardest part of starting a side hustle is deciding what your business will be. My first piece of advice in this area is: keep it simple.
One mistake I see many people make when starting a business is over-complicating it. They think they need to create the next big app, or they have grand ideas of creating a whole new product or service that is unique and special.
Don’t do this! Choose something simple. Choose something that is already being done. Choose something that already has a market and that people understand.
Starting a business is hard enough. The last thing you want to do make it even more difficult by doing something that requires lots of effort to build a market for it.
There are lots of opportunities to build a side hustle around needs that are already in demand. For example:
- Home services
- Child care services
- Business services
- Marketing services
- Consulting services
- Concierge services
- Teaching/tutoring services
Notice that these are all service businesses. While a product business can work, it generally requires more overhead (meaning cost and materials) and can be much harder to get off the ground.
Your goal in starting a side hustle is to start making money fast. A simple service business is the best way to get off the ground quickly and start generating income as soon as possible with little to no upfront cost.
Need some ideas to get the ball rolling? See my list of easy-to-launch service business ideas for some inspiration.
Forming Your Business Entity
Once you have your ideas, the next step is to form your business entity. While there is no one-size-fits-all, I’m generally in favor of starting an LLC. The LLC (which stands for Limited Liability Company) is a very simple and low-cost business structure that is very common for startups and small businesses.
In most states, the cost to start an LLC is anywhere between $50 and $300. Some states (like California) charge quite a bit more so you’ll need to decide if it makes sense for you. If the cost of an LLC is prohibitive, you can start your business as a sole proprietorship, which is often free or very low cost. A sole proprietorship usually doesn’t require any sort of formal paperwork but you’ll want to review your state, county, and city guidelines for your specific situation.
For a more in-depth look at whether an LLC is right for you, see my article on deciding whether an LLC is right for you.
For the purpose of this discussion, we’ll assume you are forming an LLC. It’s a very low-friction business entity and is a good choice for the vast majority of small businesses.
You can form your LLC by going to the Secretary of State website in your state. You can then fill out a basic online form and file your LLC online.
Once your LLC is filed (most states will have it done in a few days) you’ll want to get an EIN, which stands for Employer Identification Number. This is your tax ID for your business. While you can technically use your social security number for your business, I don’t recommend it. An EIN gives you legitimacy and privacy and most banks will require it when setting up a business bank account.
Fortunately, it's free and you can get one by applying for an EIN on the IRS website. It takes about 10 minutes and your EIN will be issued immediately.
Be sure to save your LLC documents and your EIN letter in your business files. You’ll need them for various activities in the future.
Setting Up Your Systems
Now that your side hustle is up and running, you’ll need a few tools and systems to operate.
The first thing you need to do is get a domain name and email address. Your domain is the “something.com” that people will (eventually) use to get to your website. The more immediate need, however, is professional email.
You’ll want to establish a professional email address that includes your domain name.
Step one is to register your domain. Some of the leading domain registration providers are:
Once you’ve registered your domain, you can set up an email account. This is important because from this point on, you’ll want to use your business email address for other tools you set up.
The two most popular and reliable email providers are:
Both services provide an email account as well as cloud storage and calendaring. I’m a Google fan so I go with Google Workspace but both will do the job.
The next thing you need to establish is your business bank account. While you technically can use your personal bank account for business, it’s not ideal.
Using a separate business bank account for your business provides several advantages that can help you maintain financial organization, legal compliance, and professional credibility. Some of these advantages include:
- Simplified bookkeeping: A separate account helps you easily track business income and expenses, making it easier to maintain accurate financial records and prepare financial statements.
- Clear separation of personal and business finances: A business account prevents the mingling of personal and business funds, reducing the risk of errors and helping you maintain clear financial boundaries.
- Tax preparation and compliance: Having a separate account simplifies tax filing and ensures that you can easily identify and report deductible business expenses, minimizing the risk of tax issues.
- Professional image: A dedicated business bank account can enhance your business's credibility with clients and vendors, as it demonstrates that you take your business seriously.
- Limited personal liability: By separating your personal and business finances, you help maintain the legal separation between your personal assets and your business, which is particularly important if you operate a limited liability company (LLC).
- Bank account features and services: Many banks offer specialized services and tools for business accounts, such as invoicing, payment processing, and cash management services that can help streamline your business operations.
- Fraud protection: Business bank accounts often have stronger fraud protection measures compared to personal accounts, providing added security for your business finances.
Overall, using a separate business bank account helps maintain organization, legal compliance, and professionalism, while also providing added financial security and simplifying various aspects of running your business.
When choosing a business bank account, look for a bank that has great online banking. You’ll want a bank that easily integrates with other tools and that is easy to use.
You also want to make sure that your business bank offers free ACH payments. ACH payments are electronic payments, which allow you to pay yourself (more on that soon) as well as transfer money online to other recipients.
You will also need a way to get paid. Two of the most popular tools for sending invoices and taking payments are QuickBooks Online and Wave.
QuickBooks Online is the leader in bookkeeping and invoicing, but not everyone finds it easy to use. It also comes with a cost. Note: some accountants recommend NOT using the “self-employed” version so you may want to start with the next level up.
Wave is a great alternative to consider because it is easy to use and free.
Either tool will let you invoice clients and take payments online via credit card or echeck. It’s important to have this ability in place for professionalism and to make it easy to get paid.
At this point, you are ready to do business. You have business email, a business bank account, and a system for invoicing and getting paid.
Ideally, this is the point at which you start getting clients. Many people get stuck here because they start overthinking everything. Don’t over-complicate it. Set your prices and start doing business. You can always change things later (and you will).
The fastest way to learn and make your business better is to start serving clients.
This brings us to…
Marketing Your Business
So how do you get clients? The amount of information and training available on marketing your business is beyond overwhelming. It’s impossible to offer a magic solution to getting clients in this context.
However, there are a few principles to keep in mind that will help you get started.
First, get a website. You can build a simple website for your business using one of the following tools:
Each of these services will let you build a simple website quickly and inexpensively. You don’t need something elaborate. Just describe your service and provide a way to contact you. You can always upgrade later as you grow.
Next, tap into your social circle. Send a simple message to close friends and family and let them know you’ve started a business and you would love some help getting the word out. Post on social media letting your connections know about your new business.
The key is to keep it simple and personal. Don’t try to write it like an ad or a sales message. Try something like this:
“Hey, everyone! I wanted to let my network know that I have started a new business doing ___________. I would love some help spreading the word. If you could help me out by telling your friends and family about me, I would appreciate it. You can find out more on my website at: __________.”
Naturally, you can include more information about your specific services and give more details but the idea is to simply ask for help spreading the word.
If you’ve chosen a simple business that has a market, you may be surprised at how quickly you can get a few referrals.
Remember, your point is not to build the best marketing system ever, it’s to get a few clients. Then, get those clients to start referring you. Once you get the ball rolling you can focus on more elaborate marketing later.
So how do you get paid?
This is the fun part! Once you start making money, you get to pay yourself. All of your income from your business should be going into your business bank account. To pay yourself, you simply transfer money from your business bank account into your personal bank account. This is called an “owners draw” and it is the self-employed equivalent of a paycheck.
You will do this by setting up a payee profile in your business bank account that sends money by ACH into your personal bank account.
As you get started, you’ll want to leave a buffer in your business account to cover future expenses (which should be very low at this point) but as you get more business, you can start to pay yourself every month from your business profits.
As you start to make money, you will need to think about taxes. When you’re self-employed your compensation does not include tax withholding. This means that you are responsible for setting aside and paying taxes on your own.
Self-employed individuals are typically required to pay taxes on a quarterly basis. So as you start to make money, you’ll need to start setting aside about 25% - 30% of your business income for taxes and then pay those taxes on a quarterly basis.
Fortunately, we have a guide that will tell you everything you need to know about quarterly estimated taxes.
Sustaining and Growing Your Side Hustle
Congratulations! You have a side hustle. It’s a great feeling to make money as a business owner. You are in control of your business and you get to be your own boss, which has its up and downs but ultimately can be a great way to build wealth.
As you grow, remember these principles:
- Keep it simple. As you make more money, you may be tempted to add complexity to your business like adding services or hiring employees. These things are not bad, but keeping a bias toward simplicity in your business will serve you well.
- Avoid debt. It can be tempting to try to grow by taking on debt. Do not do this. Let your side hustle grow organically. Slower and debt-free is a much better way to grow.
- Set pricing to get clients. Your first priority should be getting clients. Make it easy for them to say “yes” by offering low prices at first. You can always raise your prices later.
- Raise your prices when you start to get too busy. Once you do reach the point of getting overwhelmed, don’t wait to raise your prices. Do it promptly so you can make more money without burning yourself out.
- A caveat with these points in mind: if you're looking to grow quickly, price to win business, but remember that doing so sets an anchor in what those same clients will expect to pay in the future. Conversely, if you're trying to minimize your time and maximize your profit, price for ideal clients (e.g. higher pricing) and grow more slowly to keep your side hustle time commitment lower.
- Stay focused on what the additional income is for. You started a side hustle to make more money. Use that money to work toward your goals. Pay yourself. Build up your emergency fund. Invest in your retirement accounts. Remember why you’re doing this.
Ultimately, starting a side hustle can significantly improve your financial situation and provide you with additional opportunities for personal growth and skill development. By supplementing your primary income, a side hustle empowers you to achieve financial goals more quickly, reduce debt, or save for future endeavors.
Beyond monetary benefits, a side hustle can also offer a creative outlet, help you build valuable connections, and potentially open doors to new career paths.
Embarking on a side hustle journey enables you to cultivate resilience, resourcefulness, and entrepreneurial spirit, fostering personal growth and enhancing your overall life experience.
About the Author
Michael is a CERTIFIED FINANCIAL PLANNER™ (CFP®) and owner of Elevation Financial, a fee-only financial planning and investment management firm serving progressive SRI/ESG investors.
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