Why the ‘Money Illusion’ Makes Your Side Hustles Cost You More Than They Earn
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EXPLORE FURTHER: My side business generates $147 million annually and is available at Walmart
Over half of Americans currently maintain a secondary job apart from their regular 9-to-5 employment; however, this extra work may not necessarily lead to greater wealth.
The growth of side hustles has paralleled a significant decrease in workers’ earnings along with extended periods of low income.
inflation
, resulting in a cost of living crisis.
Extremely high housing costs and interest rates for mortgages
, along with soaring rent and grocery costs, has made gig work necessary for many Americans simply to cover their expenses.
Last year, the Federal Reserve discovered that 38 percent of gig economy workers were in this category.
wasn’t able to handle an unexpected $400 cost
if they needed to.
And
new research
indicates that for numerous individuals, taking up an additional job is not enhancing their financial standing.
In certain situations, they are really experiencing financial losses.
One reason for this is due to what is known as the ‘money illusion.’
According to psychologists, this is when people treat money differently when it lands unpredictably — like from a side hustle — rather than from a steady paycheck.
The ‘money illusion’
The net loss following gig work can be attributed partially to the ‘money illusion,’ which causes individuals to view irregular influxes of cash as extra funds or disposable income to spend freely.
‘Fluctuating income often leads to inconsistent expenditures.’
researchers at KillerStartups noted
.
On the other hand, a consistent salary allows employees to manage their funds effectively by allocating portions of their income into various categories.
It could involve setting up a budget for expenses like utilities, a separate fund for leisure activities, and additionally, a dedicated rainy-day savings reserve.
It also aids that a consistent salary can divert funds
savings into a 401(k)
without the earner needing to consider it.
Moreover, taxes for most employees are directly deducted from their paychecks.
This indicates a lower chance of overspending and lacking the funds.
face a substantial tax assessment from the IRS.
Nominal compared to real rate of return
Experts argue that another factor preventing side hustlers from earning as much as they believe is their lack of understanding regarding the distinction between nominal and real income.
A recent study by
MarketWatch
discovered that a usual gig worker makes only $250 each month from their additional job.
However, this isn’t the final paycheck it might seem at first glance.
This occurs as the expenses related to the side gig can rapidly diminish the total amount earned.
For instance, for rideshare drivers — who often take on this type of part-time work — the platform fees charged by companies like Lyft and Uber can accumulate significantly.
Various expenses like insurance, unremunerated waiting periods, and fuel also cut into the actual compensation for employees’ time.
When engaging in alternative income streams like selling second-hand goods or artwork online, costs including listing fees, payment processor percentages, and expenses for promoting your product to improve visibility within the site’s ranking system can significantly cut into your earnings.
Hidden tax traps
The tax implications for a side business frequently catch gig workers off guard.
If your additional work earns more than $400 in net income, you’ll have to pay a 15.3 percent self-employment tax.
Given state income taxes along with the aforementioned operational expenses, an additional $250 per month can diminish rapidly.
Tax professionals have likewise cautioned that
updated guidelines for disclosing gig work and platform earnings
came into force this year and freelancers should take notice.
‘A lot of people think that if it’s a hobby, or it’s part time or it’s a side gig, then they don’t owe money on that. Totally wrong,’ tax expert Mark Steber previously told .
The concealed mathematics that everybody overlooks
There are three more factors to consider, even after working out the rate of return after costs, fees and tax.
Firstly, the opportunity cost of the time spent on the actual labor. In a lot of cases, spending this time up-skilling or gaining further educational qualifications to get a higher paid job could yield better financial results.
Secondly, evaluating the monetary benefits relative to the risks involved. Specialists contend that a ‘volatility premium’ ought to be factored into gig work due to its unpredictable nature and difficulty in forecasting earnings.
This puts the worker at risk of struggling to make ends meet and cover their monthly expenses.
Finally, numerous employees overlook the monetary consequences of burnout.
Therefore, it is suggested that gig workers keep record of any sick days taken, along with additional expenditures like ordering takeout meals due to exhaustion from work.
One side hustler’s regret
The KillerStartups analyst Nathaniel Foster elaborated on his personal experience with a failed attempt at earning additional money.
Foster mentioned that he began working as an Uber driver during weekends to help reduce his student loan debt.
‘Although the idea seemed brilliant, when I sketched out the actual returns, things didn’t look as promising,’ he noted.
Taking into account the expenses for fuel and car upkeep reduced his hourly wage to $14.
The self-employment tax lowered the amount even more, and then the actual turning point happened following a small downturn.
“A minor car accident, which wasn’t covered since my personal policy doesn’t include commercial driving, devoured three months of profits,” Foster sighed.
‘Towards the close of the year, the loans remained largely unchanged, whereas my Camry’s shock absorbers were making noises akin to those of an ancient floorboard.’