After tax time is done, there’s always some extra budgeting to do. Whether a taxpayer is scrambling to come up with money they owe the IRS, or they’re figuring out what to do with their refund, Springtime is a great time to revisit one’s budget to make sure it’s still on track.
Aside from tax refunds, any source of income that didn’t come from your paycheck is something that should be budgeted and allocated carefully. Too many people don’t do this; they treat every extra dollar that comes in like free money to be spent carelessly. But that is not the smartest way to handle extra income.
Tax Refunds
The standard logic says that tax refunds are the repayment of a loan you’ve given to the government. You overpaid your taxes, and after you file your return, they give you back the extra—except they don’t pay you any interest on the loan. Therefore, a lot of financial experts say you should always owe taxes every year, so you stay in control of your money.
We understand the impulse—it’s reasonable to see a tax refund as an interest-free loan to the government, or at best a no-interest savings account. You could certainly store that money in a 6-month CD and make some money rather than leave it interest free until your refund comes in. But let’s be realistic. You won’t make that much money in such a short amount of time if you invest the money yourself and owing money at tax time is very unpleasant for most of us.
We think the more realistic strategy is to try to break even or get a small refund. If your refund is too large, you are overpaying taxes and should adjust your withholding accordingly. And if you typically owe money at tax time, withhold a little extra from your paycheck each month to make next April more bearable.
As for what to do with that tax refund you might be getting, we’ll talk about that below. First, let’s talk about other sources of income.
Side Income
It’s common in today’s economy to have a side gig or side hustle, a way to make a little extra money on the side, apart from your normal job. Generally, people think of a side gig as an extra job one takes on just for the money, while a side hustle is something one is passionate about that generates extra income.
Hopefully, this extra money is a way to achieve financial goals and escape from debt, but some people find they need this kind of income just to make ends meet. If your normal job gives you a cost of living raise of 3%, your purchasing power is actually going down because of inflation. Sometimes a side hustle is the only way to boost your income in a tough economy.
Some common side hustle opportunities:
Part-time work: Simply getting a second job is the original side hustle. If you can get extra hours on nights or weekends as a retail worker or server at a restaurant, you’ll bring in guaranteed extra income. Some seasonal work can be great because it might be exhausting to have a second job stocking store shelves, but if it’s only for a few months around Christmas, you’ll temporarily earn extra money when you need it most.
Ridesharing: Uber and Lyft are the most common ridesharing apps that allow anyone to become a driver and make extra income. Other providers include Curb, Flywheel, Side Car, and Wingz, with even more rideshare operators in individual cities. Some of these alternatives require special insurance or licensing, but if you have a car, then there is an opportunity for earning extra money by ridesharing.
Delivery driving: Aside from hauling passengers, there are a lot of options for delivery work using your own car. Options like DoorDash, Uber Eats, GrubHub, Postmates, will let you deliver meals, and Shipt and Instacart will pay you to shop for and deliver groceries to those who use their services. There is also packaged delivery through programs like Amazon Flex or TaskRabbit.
Renting a room: If you have the space for it, you could find a roommate and rent out a room in your home. Other services like Airbnb or Booking.com offer temporary solutions for vacationers and business travelers looking for an alternative to a hotel.
Wholesaling: You can start a small online business where you buy goods wholesale and resell them at retail prices, however you should only do this with a product you understand well and know how to market. There’s some risk to you because you have to buy quantities of goods with no guarantee that you’ll be able to sell them at a profit. But risk can bring rewards too, and this can be a good income opportunity in the right situation.
Freelancing: There are web portals that allow you to take on freelance jobs, whether they be creative or technical tasks, or even customer service work. WeWorkRemotely, Fiverr, Craigslist, Upwork and Remote.co are all good sources of freelance work.
Blogging: Creating a blog is tougher to profit from these days than it used to be. But by regularly creating good content, you can post affiliate links to lure sponsors to your content, create eBook versions of your blog posts, establish membership fees, or launch an online store associated with your blog. Because this is a lot of work, any blog you write should be focused on a topic you enjoy and understand well.
Sell Creative Work: If you are the creative type, you can set up shop on Etsy to sell your handmade creations. Other options include Shopify, Amazon Handmade, Bonanza, and Storenvy. Beware that most of these options will come with modest monthly fees, so you should be sure you’re ready to make some regular sales before you launch your account.
Other sources of income
Whether you make money from a yard sale, collect an old unpaid debt, win a cash prize in a contest, or sell stock, you should treat every dollar the same.
Any money that comes in, no matter the source, is income. Too many people create a budget that factors in their normal paychecks, but aren’t flexible about extra money that comes in.
New Tax Rules for Extra Income
If you make more than $600 from any given source (like one of the side hustles listed above) you have to declare that on your income taxes.
Up until now, people who sold goods online could avoid taxes up to $20,000 earned. But as of 2022, the $600 threshold applies to any income received through a payment platform.
That means if you get money through PayPal, Venmo, or the like, you are going to get a 1099-K form and that income is reported to the IRS.
You’ll want to separate business transactions from personal transactions, so you aren’t taxed on gifts or transfers that aren’t truly income. The best way to do this is to create a business profile that is separate from your personal profile, to make tax time easier.
It’s also going to be more important to hang onto receipts and paperwork around side income sources in case you get audited by the IRS later.
The Purpose of Your Budget
Keep in mind why you create a budget in the first place. You want to pay off debts, set aside enough money to meet all your obligations, and save toward your goals. Getting a big tax refund is no reason to change your strategy.
It’s tempting to cash a big tax refund check and immediately spend it on one of your “wants”, like a vacation or luxury item. (And you might get to do that, after you take care of your other priorities first.) But, first, look at all your obligations. Are your bills paid in full this month? Did your normal income cover all your expenses? If not, use any extra funds to make up the shortfall.
Next, look at debt. Some portion of your income may be going to pay off credit cards, to pay on an auto loan, or to pay off a personal loan. If your tax refund will knock out those debts, you’ve got to put the extra money toward them. Yes, that’s less fun than using the money to fund a shopping spree, but once you are debt free, you’ll have more money left over in your budget every month to spend on wants and other goals.
Finally, look at savings goals. After putting money toward regular obligations and debt, put what’s left toward your goals. Here’s where you might be able to enjoy the extra money that came in. Say you were saving towards a vacation and a tax refund check makes that savings large enough, then you’re ready to go!
The bottom line is that your budget represents a set of priorities, and extra income should be spent according to those same priorities.
Learn to budget
If you haven’t looked at your budget lately, revisit it, and make sure the math is still working. Check out our Budgeting 101 and Power of Paycheck Planning courses, available for free from our FIT Academy.
No matter where your money comes from, if you stay organized and stick to your plan, you’ll end up with true, lasting financial security.
