A profitable side hustle probably won’t move the needle on your financial goals
I’m all for career changes and entrepreneurship. This little blog is a side hustle for me, although so far I’ve grossed a below-zero amount. 😳
But even profitable side hustles usually don’t serve us. Let me explain.
Why did you start your side hustle? What did you want to achieve with the money you make?
If you’re like me, you’re shooting for one or both of these:
- Earn money to improve our quality of life
- Improve your overall financial situation: pay down debt, increase emergency cash cushion, put money into retirement savings.
Once a side hustle becomes profitable, Goal 1 is nearly always met. Goal 2 is rarely achieved.
Why we suck at achieving our goals
In general humans’ “needs” scale up with their income. I can personally attest to this.
After getting a raise at work, I suddenly thought, “Wow! Compared to my salary 3 years ago, I have unlimited money!!!”
I started saving more money. But then I also thought, “Why not live a little?” I started making tiny spending changes that seemed like no big deal. I bought some clothes I didn’t need. I took a small vacation I would otherwise not have taken. All this added up over time, eating into my savings.
My behavior is not at all uncommon. In fact, it’s the norm. It’s easy to get that “unlimited money” sensation even with a couple hundred dollars of extra cash.
There’s nothing wrong with using some or all of your side hustle income to have fun. But at least do it plan-fully. Don’t be like me —sabotaging my goals without even realizing it.
The “unlimited money” sensation is the reason why even people who make $500k per year can feel strapped for cash. Crazy, right? Even the super-rich — who can afford the best education and the best financial advice — can exhibit low common sense.
A 2016 study presented at the American Economic Association suggests that poor people actually have better common sense with money than people with above-average incomes.
Study participants were presented with scenarios involving small amounts of money and asked how they would respond. Poor people showed better performance on the mathematics of money, perhaps because they had a concrete idea of what each small amount of money could buy them? On the other hand, above-average earners tended to make illogical decisions on the questions.
I don’t even have to tell you how many super-rich people have gone broke. Not just lottery winners and football players. Businessmen, financial consultants. Even billionaires.
This doesn’t mean you’re going to suddenly get stupid when you have more money. But it could suggest that you’ll stop paying attention to money in the same way, thus making a larger number of illogical decisions.
We all do this. It’s human nature. See also: To Achieve Your Goals, You Must Outsmart Yourself.
If you don’t make a plan for every dollar your side hustle brings in, you’re in danger.
Statistically, the odds are against you improving your financial situation using newly earned side hustle income. Side hustle income is just a “raise” that you earn in your off hours. It can feel like unlimited money.
If you’re not plan-ful, gradual lifestyle changes will accumulate. Before you know it, your money will trickle out of your wallet like a creek running downhill.