Debt has a way of racking up. Between a mortgage, car loan, credit cards and student loans, the average American household owed $137,063 in 2016.1
Given the debt that many people carry, it's not surprising to learn that growing numbers of Americans have two jobs. In 2015, 7.8 million Americans had a second gig, often called a "side hustle."2
If you're one of the many people trying to pay down debt using your side-hustle money, here are a few important things to keep in mind.
Side hustle money is still subject to taxes
Before you start doubling your student loan payment, for example, you should know that the government will still require a portion of your side-hustle earnings. Any income, whether it's from a ride-sharing job or selling homemade jewelry online, is taxable.
To account for this, you can do one of two things. You can talk with an accountant, who can estimate how much you'll owe in taxes, and pay estimated quarterly payments. Or, you can increase your withholdings at your primary job.
Paying down debt vs. adding to an emergency fund
If you're collecting additional income, make sure you have a suitable emergency fund before you start tackling your debt.
You never know when an emergency will strike. If you don't have enough money set aside, you may accrue even more debt. And if you can't pay an unforeseen medical bill, for example, you might have to put it on a credit card, which, in turn, increases your debt load.
Experts suggest having enough money saved to cover at least three to six months' worth of expenses. Once you have that set aside in a separate bank account, focus on your debt.
Tips for paying off debt with side hustle money
With your emergency fund stocked and ready, you can turn your attention to your debt. Here are some tips to make sure you stay on task:
- Get organized Make a list of all the debt you have. Create a spreadsheet that includes the name of the lender, how much each balance is, what the interest rate is, and the length of the loan term.
- Make a plan Which debt will you work on first? Financially speaking, it's smartest to pay off the loan with the highest interest rate first. However, paying off smaller balances provides a sense of accomplishment, which can encourage you to stick with it. The choice is yours; just remember to make all payments on time each month.
- Open a separate account When you're serious about paying off debt, it's easier to deposit your side-hustle money into a separate savings account. If your personal checking account gets an influx of cash, it's harder to keep track of it. You may even be more likely to spend it.
- Use financial planning tools Use a financial planning tool to monitor and track your success. If your bank has an app, download it so you can always see how much money you have in your accounts. You can also use a savings account calculator to see how much interest you have the potential to collect over time.
- Set up automatic payments To ensure you pay your debt off quickly, consider using automatic payments. Schedule your payments to go out on a regular basis so you don't forget to make them.
With this knowledge, you'll be able to take a strategic approach to paying off your debt and put that side-hustle cash to good use.