It is very common in the present days to have multiple sources of income. Most people work other side gigs, invest, freelance or own small businesses besides their main jobs. While the chances of increasing financial security through multiple income streams are high, so is the complexity that comes along with it. Now, managing multiple income streams requires good organization, planning and discipline to keep all things in sync. This blog article shall discuss a few effective ways of organizing and maximizing the benefits of various income sources.
Why Multiple Income Streams Matter?
As easy as having numerous streams of income can be, it is also not a low maintenance activity. Without a proper plan, you may get lost in tracking cash flow, do accurate tax filings, or even keep track of each stream. According to TD Ameritrade, nearly 38% of people in the U.S. have more than one source of income, but many feel overwhelmed by the organizational demands that come with it.
- Start with Clear Income Goals: Plan to manage multiple streams of income only after you have decided on the definite income goals. What do you want to achieve? You wish to supplement your main income to save up for that huge purchase or freelance full-time? Define long-term and short-term goals and you will know better where to place priority and put resources to good use.
Having both a long-term and a short-term goal for you to work towards helps establish direction. A long-term goal might be to earn $10,000 in passive income a year while a short-term goal could be to earn an additional $500 per month on a side hustle. Clear goals give you the basis of comparison for each income stream's performance.
- Open Separate Accounts for Each Income Source: It becomes easier to track multiple income streams with the use of different bank accounts. You can therefore track the inflow and outflow of cash, expenses, and profitability more easily. For instance, you will have one account with money from primary employment, another with freelance money, and passive investments in another account.
- Use High-Yield Accounts for Passive Income: If you are earning passive income, think about keeping it in a high-yield savings account so you can gain some interest. NerdWallet reported that high-yield accounts can have APYs from 0.50% to 2.00%, so your savings will mushroom over time.
Income and Expenses Segregation
You will also track your income and expenses for organizational purposes. Tracking sometimes feels overwhelming, but there is software that can help make things easier. Some of these apps include QuickBooks Self-Employed, Mint and YNAB (You Need a Budget) for detailed income stream and expense tracking.
Automate Income Tracking Using Financial Apps
Applying an app is particularly helpful when the income is freelancing or small businesses. For example, QuickBooks allows you to link all your accounts; after this, it is easy to tag these income and expenses. According to Intuit, people using financial tracking applications save an average of 10 hours a month in bookkeeping.
Follow a Pattern System of Invoicing and Payments
Having freelance or consulting income makes it relatively easy to keep clear records. This means you will always get paid on time and keep accurate records because you will be sending invoices regularly. You can set up tools such as FreshBooks or Wave to auto-generate and send out invoices. You should have a dedicated day every month to focus solely on invoicing, so you don't forget.
Set Up Automatic Reminders
Many invoicing tools have automatic reminders, so you don't have to work extra hard to remind clients who owe you money. Such tools help you manage your cash flow and allow for more timely payments-the difference between having enough funds to cover monthly expenses if you rely on that money or having less, if available.
Set Aside Some Funds for Taxes
Taxes are confusing when you have multiple streams of income. In the U.S., most self-employed people have to pay estimated taxes quarterly. If you receive freelance money or side money, then it's a good idea to set aside 25%-30% of your earnings for taxes, which will cover federal, state and self-employment taxes.
Maintain a Separate Tax Account
Best practice is to have a tax savings account. Fund part of your income into this account monthly to have funds ready for use at tax times. Not only will you eliminate tax-time anxiety but also not be tempted to draw upon the tax funds for other purposes. Utilize the IRS to set aside 30% of earnings from self-employment for federal and state taxes and 15.3% for self-employment tax in the United States.
Establish How You Will Budget Each Source of Income
Managing multiple streams of income requires establishing a budget for each one. This helps in controlling spending, planning for future investments, and ensuring profitability. For instance, if you have another full-time business, you may operate separate accounts for operational costs, marketing, and savings. Review each budget monthly to track the progress and make changes if needed. If one of the streams is constantly underperforming, it may not be worth your time, or perhaps you need a change of strategy. You are constantly aware of your finances, so you make timely changes through monthly reviews.
Focus on High-Earning or High-Growth Streams
Not all the income streams will contribute equally. Some may be more profitable and have more growth potential than others. Prioritize those with the best returns, especially if time and resources are limited. There's a rule of thumb called the 80/20 Rule or Pareto Principle which states that, 80% of your results come from only 20% of your efforts. Use this principle to concentrate on income sources that are the most profitable and reduce or eliminate time spent on those that bring nothing significant to your bottom line. For example, if freelancing pays much better than other gigs, you might spend more hours here.
Reinvest in Earnings Growth
If one or more of the income streams show promising returns, then consider reinvesting earnings back into them. Reinvestment can result in potential additional income via further training, marketing, and new equipment. Allocate a fraction of your earnings to passive income investments, like dividend-yielding stocks or real estate. Schwab contends that this is also an effective way to earn passive income through invested stocks yielding 2-3% dividends and help diversify earnings over time.
Schedule Review
Multiple streams of income should be regularly monitored. Schedule a monthly or quarterly review to monitor how each stream is doing, which expenses are rising, and what adjustments you may need. Use such key metrics as return on investment and profit margins for measuring the effectiveness of each side hustle. For instance, if a particular side hustle gives less than an 10% ROI, it is probably the time to decide whether or not the side hustle is still worth doing. The above metrics will help you make data-driven decisions on what effort to put where.
Seek Professional Advice When Necessary
Having multiple streams of income also adds complexity to taxes, investments, and the overall financial strategy. A financial advisor or accountant can help work through these complexities and other tax deductions to advice for cash flow management.
Your Path to Financial Independence
It's no small feat to juggle multiple income streams, but when done right, it is well worth the time and effort. While some may begin by creating clear goals and tracking one's income, ranking income sources will most likely help you ensure you are using the sources of money with the most potential first. Here is how to stay organized and maximize your potential income.
