This transcript was generated from the episode audio and may contain minor errors.
[Music]
As we begin today's episode, I'd like to wish you a happy Boxing Day. Boxing Day, what is that? If you're American like me or perhaps from any other country that doesn't celebrate Boxing Day, well, this is a day in which you are entitled to punch any member of your family who has frustrated you this holiday season. You can do that without any consequences because it is this special day, Boxing Day. Alternatively, it's also known as a traditional day off for servants and the day in which they received a Christmas box from the master.
The servants would also go home on Boxing Day to give Christmas boxes to their families. Fun facts there. Now, here we are towards the end of the year. A lot of people are looking at their finances and doing some cleaning up. You might wanna make some charitable donations.
You might need to rebalance your 401k or any other investments. And you might think about a contribution toward your retirement fund. Now, for anybody out there who's like, what's a retirement fund? Like, I don't have any money at all. Well, you might start thinking about it because research shows that even if you have a low income or are still struggling, it's still helpful to save for the future.
So that's what today's caller is wondering about. Specifically, she's wondering about using her side hustle income for her retirement fund. Is there anything specific that might be good to know either in terms of taxes or motivation or something else? That's what we're gonna look at in this episode right after this Boxing Day message from our sponsor. [Music]
Hi, Chris, this is Jessica from Denver.
And thanks for all the helpful advice over the years. I'm trying to save for retirement and according to online retirement calculators that I've seen, I'm a little behind. I know that your goal with side hustle school is to help every listener earn at least $500 a month. And my idea is to put all my side gig profit into a retirement fund that invests in low fee mutual funds. Is there any downside to this?
Either in terms of taxes, cashflow, or just motivation? Thanks for any advice you can give me. [Music]
Thank you, Jessica. So glad you're out there. Great question.
And let's start by saying I think it's good to pay yourself something as soon as you're profitable. Okay, so as soon as your business is making any kind of money, I think it's good to pay yourself something. Don't just reinvest it all in the business. It's good to reinvest in your business, but it's also important to say, well, I'm not just working for the sake of my business. Like hopefully there's gonna be some financial reward to me as well.
So first things first, I do think it's good to pay yourself. And as for what you do with those distributions, that's kind of up to you, right? So I think for some people, merely taking it from one account and putting it in another without spending it on anything could be demotivating. But I think alternatively, there are a lot of people for whom it feels motivating to take that income and put it in a savings plan. 'Cause you're like, well, I worked for that.
Now I've got this other plan or this other account that's going up. Hopefully the balance is going up over time. So motivations are personal. I think that's the point there. In terms of cashflow, well, you don't wanna put money in a longterm savings account that you expect to need anytime soon.
So make sure you're not doing that, especially with mutual fund investing. The idea is to keep it there for a long period of time. In terms of taxes, this can actually be advantageous, depending on your overall tax situation, country of residence and so on. For everybody in the US and you get in this situation, you might wanna look at a SEP retirement account. That stands for simplified employee pension.
And I use this myself instead of an IRA because it allows you to make a greater contribution. And the amount that the IRS allows you to use is different every year. It increases slightly every year. And in 2020, you could put either 25% of your compensation, like up to 25% of what you've earned, or $57,000, whichever is greater. So once your business really starts taking off and like, look, we've got a lot of people we featured on the show who are doing six figures, multiple six figures, sometimes more.
That's pretty significant deduction, right? $57,000 compared to whatever it is for a traditional IRA. So to return to the original question, should you use your side hustle income for retirement fund? Well, you certainly can. It's up to you in terms of the motivations, but tax wise or cashflow wise or anything else, there's really no downside to it.
So good luck, Jessica. Good luck everybody else out there as well. I hope you enjoy this boxing day. I hope you enjoy the rest of this year and let's all work together for a strong 2021. All right, I'm out for today.
My name is Chris Guillebeau. This is "Side Hustle School." [Music]
From the Onward Project.
