When I made my freelance writing side hustle my full-time career, it took me precisely two months to panic and submit an application for a part-time job at Petco.
Why? Money. Moolah. Cold, hard cash. I was barely scraping by.
I’d like to say my tale of financial woe is unique. But in reality, it’s more the norm than the exception. The majority of businesses struggle to manage their cash flow. And research shows that money is the biggest barrier to starting a business in the first place, even ahead of a lack of knowledge or fear of failure.
Fortunately, you can squelch some of your own money fears by going through the financial planning process before you make the leap from side hustle to full-time. Do you feel your eyes glazing over already? Stick with me. I’m breaking down the multihyphenate's (simple, I promise) guide to financial planning right here.
What exactly is financial planning?
Financial planning sounds like something you’d do at a long, walnut conference table in a stuffy boardroom. However, financial planning applies to any type of business—regardless of whether you’re a one-person show or a large corporation.
To put it simply, financial planning is the process you go through to understand your expenses and your financial goals so that you can then figure out how you’ll make those happen.
When you’re thinking about taking your side hustle full-time, financial planning helps you:
- Identify and understand your expenses
- Determine how much you need to earn to cover your regular expenses
- Outline your short- and long-term financial goals and ambitions
- Plan for more intentional spending and saving
- Move into full-time business ownership with more confidence
Rather than taking the leap into entrepreneurship and crossing your fingers that it works out, financial planning helps you set yourself (along with your bank account and your future) up for success.
Your (simple) finance glossary: Common terminology to know
If you don’t consider yourself a numbers person, financial planning has an extra intimidation factor. That’s amplified by all of the jargon.
So before we get into any sort of financial planning template or process, let’s build some familiarity with a couple of accounting terms you’ll see crop up as you work on your own plan:
Example: Your clients paid you a total of $45,250 for freelance writing services in 2023.
2. Net income: The amount your business earned after you subtract expenses from revenue. You might also hear this called “net profit.”
Example: Your business expenses were $10,500, so your net income is $34,750.
3. Cash flow: The amount of money flowing in and out of your business.
Example: You had $5,200 in invoice payments come through in the month of November, but you also spent $1,345 on a new laptop and other miscellaneous office supplies.
4. Deduction: An amount you’re allowed to deduct from your taxable income, which reduces the amount of tax you owe.
Example: You purchased a new laptop for $1,200. You can subtract that amount from your taxable income (as long as you keep the receipt).
That’s by no means an exhaustive list of all of the accounting terminology you might come across. However, it should help you better understand some of the financial planning concepts we’ll discuss next.
The financial planning process: 5 steps to better peace of mind
Your own financial planning process can be as simple or complex as you want it to be. You could involve qualified professionals—like an accountant or a financial planner—or you can do it entirely yourself.
If you’re going the DIY route, here are five straightforward steps to work through as you plan for your business and your financial future.
Step 1: Figure out your basic living expenses
Inevitably, the biggest question people have when making the leap from side hustle to founder is this: How much do I need to earn to make this work? The answer to that question will vary pretty widely, as it hinges on your typical expenses. And that’s why determining how much you spend in a typical month or year is such a crucial first step.
Anna N’Jie-Konte, CFP is the President and Director of Financial Planning at Re-Envision Wealth. As you analyze your own expenses, she recommends thinking about your costs in two categories:
- Bare bones spending: How much do you spend to cover the bare minimum—meaning, just the necessities you need to get by?
- Ideal spending: How much do you spend when you’re less mindful of your expenses and indulging more?
You don’t want a financial plan that’s so exact and close to the bone that you can’t even order a pizza without throwing off your entire budget. So, identifying those two categories and then planning for somewhere in the middle will give you a little more breathing room.
“If you have not actively budgeted before, you can usually get a good sense of your annual expenses by checking out your credit card’s annual spending summary,” Anna adds.
Comb through your own statement and jot down your numbers in this quick worksheet that includes the major categories of expenses:
Step 2: Plan for your business expenses
Think you know exactly how much your life costs? Not so fast. When forming your financial plan, you can’t just think about your living expenses—you need to factor in your business expenses too.
Even if your business has relatively low overhead, making the move from a traditional full-time job means having several other financial obligations on your plate. For example, you’re entirely responsible for covering your:
- Health insurance: Unless you can be a part of your parents’ or your partner’s plan, you’ll need to cover your own insurance.
- Retirement savings: Full-time entrepreneurship means no more company-sponsored retirement plan or company matching.
- Taxes: Gone are the days when they were automatically taken out of your paycheck. You’ll need to pay taxes yourself (don’t worry—we’ll talk more about this in detail).
- Time off: For a lot of business owners, not working means not earning. You’ll need to account for things like sick time, vacation time, or extended leave so you can afford that time away.
- Supplies, equipment, and more: From your website hosting to a pack of pens, you’re solely responsible for paying for everything you need to run your business.
Ready for another worksheet? While you probably won’t be able to be as exact here, you can forecast your major business expenses using this chart:
Once you feel like you have a good handle on what you can expect to spend on your business in any given month, add that to the basic living expenses you figured out in the previous step. Now you have a ballpark idea of the amount you need to earn in order to cover it all. It doesn’t hurt to throw in a little bit of a buffer, just to play it extra safe.
Step 3: Understand your tax obligations
Taxes feel like an entirely different world when you work for yourself (I still live in fear that the IRS is parked outside my house in an unmarked car). And, even if you’ve been side hustling until now, your tax situation can still change once you dive in full-time, depending on how much you earned through your side hustle.
“There could have been enough tax withheld from the traditional job to cover the tax brought on by the side hustle,” explains Jon Brunette, CPA and Co-owner of Brunette Tax and Accounting LLC (full disclosure, he’s my accountant).
Let’s look at two big pieces of the tax puzzle when you’re self-employed: the amount and the frequency.
How much will you pay in taxes?
One of the biggest shocks when you start paying your own taxes is just how much you have to pay—something you were insulated from when you worked full-time. When you’re employed in a traditional capacity, “The company also has to match and pay in the same amount of social security and Medicare taxes,” Jon says. But when you’re doing your own thing full-time “you are considered both the employee and the employer and therefore are responsible for both shares of tax.”
That can add up to a pretty significant chunk of your income, with Jon noting that just the social security and Medicare tax alone (you’ll hear this referred to as Federal Insurance Contributions Act or “FICA” tax) are 15.2% of the net income the business earns. Then you have to pay your federal and state (if applicable) taxes on top of that.
So how much money should you set aside for taxes?
That depends on things like your tax bracket and your state. But the general guidance is to save 30-40% of your net income to pay your taxes every quarter.
That means if your net income (remember, that’s your revenue minus your expenses) for a quarter is $28,000, you’ll need to pay the IRS anywhere from $8,400 to $11,200 for that quarter. Ouch.
That’s just an example and not a hard and fast rule. Connect with your own accountant about your unique tax situation.
How often will you pay taxes?
The frequency of taxes is another thing that can take a lot of people by surprise. When you’re employed in a full-time job, you probably think about taxes once a year or so—when it comes time for your annual return.
But when you’re self-employed, you need to think about taxes at least quarterly, because you’ll send a percentage of your income to the IRS every single quarter.
Those are called your quarterly estimated tax payments and paying them regularly saves you from owing a huge amount of money at tax time and also helps “remove any underpayment interest that the IRS and state can charge for not paying taxes throughout the year,” Jon says.
Step 4: Set up the logistics
As you iron out the digits themselves, it’s also smart to set up some systems to manage the financial side of your business, such as:
- Recordkeeping: Whether you’re going to get dedicated accounting software or want to set up your own spreadsheet, figure out where and how you’ll keep track of all of your business income, expenses, and receipts.
- Bank accounts: Pretty much any accountant will recommend setting up a separate bank account for your business. I actually have two: one that I use for all of my business income and expenses, as well as one that I use specifically to save for taxes every quarter.
- Professional guidance: It never hurts to have some experts in your corner. Even once you get through the financial planning process, you’re bound to have more questions come tax time. Find an accountant you trust now so you have a trusted advisor to approach when you need to.
Taking care of those as part of your financial planning process can save you a lot of hassles and headaches when you turn your side hustle into your full hustle.
Step 5: Save before taking the leap
At this point, you have a solid idea of what you need to earn to cover both your living and your business expenses. However, it can take some time to actually start bringing in the money you need.
For that reason, you might want to think carefully about when to make the jump. Anna usually recommends “once your average monthly freelancing income or your pipeline of work surpasses your monthly expenses.” Even if your side hustle is already bringing in enough, it’s smart to build up an emergency fund to cover any business growing pains or unexpected expenses that crop up. As far as how much of a cushion to save, Anna recommends the following:
- Single-income household: Save six to nine months of expenses
- Dual-income household: Save three to six months of expenses
You might not need to tap into that emergency fund, but it’s still nice to know it’s there.
Demystifying the financial planning process
Financial planning sounds complicated. But when you boil it down, it’s simply the process of figuring out how much you need to earn to live the life you want.
Sure, that involves a little bit of number crunching, but it’s nothin’ you can’t handle.
Follow the above steps and get some qualified people in your corner. You’ll be ready to enter into the world of full-time entrepreneurship with confidence—and hopefully without any panicked applications to Petco.
Editor's note: While we consulted with financial experts for this article, this content does not constitute as financial advice. Please consult with a professional financial advisor to help understand your unique needs.