Financial realities of side hustling, freelancing

PRINCESS ETUK sheds light on the financial realities of freelancing and side hustling, emphasising the need for informed decision-making in navigating this evolving economic landscape. She aims to equip readers with practical strategies to address challenges like income volatility, tax obligations, and absence of employer benefits, while also highlighting the immense opportunities for financial independence and creativity

In today’s dynamic economic landscape, traditional employment is no longer the sole path to financial stability. Many individuals are venturing into side hustles or full-time freelancing as alternatives or supplements to their primary sources of income. While this shift offers flexibility, creativity, and potential for increased earnings, it also comes with unique financial implications. Understanding these implications is crucial for anyone considering or already navigating this path.

The rise of the gig economy

The gig economy has grown exponentially in recent years, driven by technological advancements and shifting workforce preferences. Platforms like Fiverr, Upwork, Etsy, and even ride-sharing services such as Uber and Lyft have provided avenues for individuals to monetise their skills and passions. Additionally, content creation through platforms like YouTube, Instagram, and TikTok has created opportunities for creatives to generate significant income streams.

For some, freelancing and side hustling provide a way to escape the confines of a 9-to-5 job, offering freedom to pursue passions or establish a flexible work-life balance. Others turn to these avenues as a means to supplement income, particularly in the face of rising living costs and economic uncertainty.

However, the allure of flexibility and control over one’s work schedule often overshadows the significant financial considerations tied to this lifestyle. From managing unpredictable income streams to navigating taxes and securing benefits, freelancers and side hustlers face challenges that salaried employees rarely encounter.

Income volatility and uncertainty

One of the most significant financial implications of freelancing and side hustling is income volatility. Unlike a salaried job with a predictable monthly pay cheque, freelancers often experience fluctuating earnings. This unpredictability can make budgeting and financial planning challenging.

For instance, a graphic designer freelancing on Upwork might earn N4m in one month but only N1m the next. Similarly, a content creator on YouTube might experience a spike in revenue from viral content one month, only to see a significant drop the next due to algorithm changes or reduced audience engagement.

Side hustlers, especially those balancing their hustle with a full-time job, may face additional complexities. The need to manage multiple income sources can make financial planning more intricate, particularly if side hustle earnings are inconsistent or irregular.

Managing income volatility

To navigate these uncertainties, freelancers and side hustlers can adopt the following strategies:

Build an emergency fund: Aim to save at least three to six months’ worth of living expenses as a cushion against income gaps.

Track income and expenses: Utilise budgeting tools or apps to monitor cash flow and identify spending patterns. This creates clarity and helps avoid overspending during high-income months.

Diversify income streams: Relying on a single client or gig is risky. Expanding to multiple clients or exploring additional hustles reduces the impact of losing one source of income.

Adopt a “Pay Yourself First” approach: Consistently set aside savings or investments from every payment received, ensuring future financial security.

Tax implications

Freelancers and side hustlers are considered self-employed, meaning they must manage taxes independently. This shift can be daunting for those accustomed to traditional employment, where taxes are automatically deducted.

Self-employment taxes include social security and Medicare contributions, typically amounting to 15.3% of net earnings. Beyond these, freelancers are required to estimate and pay quarterly taxes. Failing to do so may result in penalties, compounding financial stress.

Tips for managing taxes

Set aside a percentage of earnings: Allocate 25-30 per cent of income specifically for taxes to avoid last-minute surprises.

Track deductible expenses: Keep detailed records of expenses like office supplies, internet bills, travel, and software, which can significantly reduce taxable income.

Invest in accounting software: Tools like QuickBooks or Wave simplify tax preparation and expense tracking.

Consult a tax professional: Expert advice can uncover additional deductions and ensure compliance, often saving more money than it costs.

The Hidden Cost: Lack of Employer Benefits

One of the most apparent trade-offs of freelancing or side hustling is the absence of employer-provided benefits. These benefits, which include health insurance, retirement plans, and paid leave, significantly contribute to financial security. Freelancers must bear these costs independently, which can be substantial.

Health Insurance

Healthcare expenses can be a significant financial burden for freelancers, especially in countries lacking universal healthcare. While marketplace insurance plans or group coverage through professional associations are available, these options often come with higher premiums and less comprehensive coverage compared to employer-sponsored plans.

Retirement planning

Without employer-sponsored retirement plans, freelancers must proactively secure their financial future. Available options include:

Designed for self-employed individuals, these accounts allow higher contribution limits, enabling freelancers to save more.

Simplified employee pension IRAs: These plans provide another tax-efficient option for self-employed workers looking to save for retirement.

Paid time off

Freelancers lack paid sick days, holidays, or vacation time. Income halts during these periods, making it essential to plan financially for downtime.

Overhead costs

Freelancers often underestimate the operational costs of running their businesses. While these expenses are usually tax-deductible, they can strain cash flow without proper planning.

Key expenses include tools and equipment, laptops, software, internet access, and other essentials. Office Space: Co-working spaces or maintaining a home office.

Marketing: Building a professional website, paying for ads, or creating promotional materials.

Professional Development: Investing in courses, certifications, or attending industry events to stay competitive.

Planning and budgeting for these costs ensures freelancers can maintain professionalism and quality without overspending.

The emotional toll of financial uncertainty

Freelancing and side hustling, while financially rewarding, can take a toll on mental health. Financial instability can lead to stress, anxiety, and even burnout. The constant need to secure clients, meet deadlines, and manage unpredictable income adds layers of pressure that can affect overall well-being.

For side hustlers juggling a full-time job, exhaustion and reduced productivity are common, potentially affecting both the main job and the hustle.

How to address financial stress

To address financial stress, freelancers and side hustlers should start by setting realistic goals and clearly defining income targets and work schedules to avoid overcommitting and feeling overwhelmed.

Joining support networks, such as communities or forums where peers share ideas and encouragement, can provide a sense of belonging and valuable insights.

Prioritising self-care is equally important, with time allocated for relaxation, exercise, and hobbies to maintain mental and physical health.

Despite their challenges, freelancing and side hustling offer unique opportunities for financial growth. Freelancers enjoy unlimited income potential, as their earnings are not capped like those in salaried roles; they can scale their income through high-paying clients or increased productivity.

Building expertise in niche areas enhances demand and pay rates, while online platforms enable them to work with clients worldwide, expanding their reach and earning potential.

Additionally, many freelancers transition into full-fledged business owners, creating multiple revenue streams and long-term wealth, turning their ventures into thriving entrepreneurial pursuits.

Balancing risks and rewards

Success as a freelancer or side hustler requires balancing the inherent risks and rewards of self-employment. Proactive financial planning, skill enhancement, and leveraging tools like accounting software can help mitigate challenges while maximising opportunities.

The financial implications of being a side hustler or freelancer are multifaceted, encompassing challenges like income volatility, tax obligations, and the absence of benefits. However, these hurdles are not insurmountable. With careful planning, strategic decision-making, and a willingness to adapt, individuals can navigate the gig economy successfully.

In conclusion, freelancing and side hustling offer immense potential for financial independence, creative fulfilment, and professional growth. By understanding the realities and planning accordingly, individuals can unlock the freedom to define their career journeys while achieving long-term financial stability. Whether it’s a full-time endeavour or a supplemental income source, the gig economy holds the key to a new way of working and thriving in today’s economic environment.