Many of us take on side gigs and earn extra income outside of our full-time jobs as physicians. While the additional money is nice, it increases the risk of living beyond your means.

Here are four best practices to keep in mind when it comes to managing your extra cash—your future self will thank you.

 

Save some for taxes 

 

Anytime you earn extra money, you have to pay taxes on that income. This is something I learned the hard way. As a resident, I owed hundreds of dollars to the IRS at tax time—this year I owe around $5,000. Thankfully, I have saved money for this bill over the last few months, meaning it’s part of my budget and not necessarily a burden. 

If you’re like me and you have additional revenue streams, be sure you’re setting enough money aside for taxes. Remember, you have to account for federal taxes, state taxes, and FICA taxes (Social Security and Medicare). 

 

 

Pay down debt 

 

Lots of Americans have some form of debt, and doctors are no different. Many physicians, especially those in the early stages of their career, have debt from student loans, credit cards, auto loans, or a mortgage. Paying down debt, especially debt with a high interest rate, is the best use of your side hustle income, in my opinion. 

 

Unlike investing, paying down debt gives you a guaranteed, inflation-protected return on your money and helps you build your net worth at the same time.

 

Reinvest it in your side gig

 

Reinvesting your side income back into your side business is another good use of the money, where it can grow and return even greater profits in the future. 

The act of reinvesting money you earned into the business can take various forms. For some physicians, this means paying down existing business expenses and debt so they can keep more of the money they earn as profit. For other physicians, this means buying certain equipment or office space that can make them more efficient at their jobs.

 

Build up your savings

 

Whether it’s your business savings or your personal savings, every person needs some money set aside for a rainy day. Although things may be going well for you now, that could change instantly, negatively impacting your compensation and revenue.

You never know when an unexpected bill could arise, or some unforeseen event (eg, the global pandemic) could impact your business. Be sure you’re prepared for this by saving money in an emergency fund.

If your emergency fund is fully funded, consider investing some extra money in your retirement account. As I’ve previously covered, unlike traditional brokerage accounts, retirement accounts have several tax benefits and protections that allow us to invest money for the long-term in a protected way. 

 

If you are a 1099 contractor, you are both the employee and the employer of the business. Per IRS rules, each person gets one employee retirement account contribution (which you may already use at your main job) but you can make a separate employer contribution (of around 20% of your net income) to retirement accounts for each business you have.