There are many different ideas for a side gig and several different options for what we can do with money from our side gig, but what about investing it? There are 4 ways I’ve considered investing the money from my side gig and each have their own pros and cons. They are:
1) Put the money into a Roth IRA. This allows me to invest in index mutual funds in a way that’s tax free and will gain interest overtime. When I take the money out in retirement, I can do so tax-free. Plus, if I happen to need this money before that to put a down payment down on a home, pay off some of student loans, invest in real estate, or pay some unexpected medical expenses I can do so without any penalties.
2) Increase the money I contribute to my job’s 401K. Technically you can’t put your side income into a work 401K but you could open up a solo 401K or increase the percentage of money you contribute to your work 401K up to the $19,000 yearly limit. The benefit of this is that you are still investing toward retirement in a way that’s tax efficient and you don’t have to worry about managing another retirement account with different investments. Plus, if you have federal student loans like I do and are on an income-driven repayment plan going for public service loan forgiveness, increasing the percentage you contribute toward your 401K actually lowers your monthly student loan payments which may leave even more money in your pocket each month.
3) Open a taxable “brokerage” account. If you have already contributed the max amount to your retirement account or Roth account but still want to invest in stocks and index funds, open up a brokerage account. This will allow you to invest in the stock market in a way that will gain you interest over time but isn’t tied to your retirement. This means if you happen to need the money for home renovations, better car, or a lavish vacation you can have your broker sell some of your stocks and get the money you need when you need it. Opening up a taxable “brokerage account” isn’t the most tax-efficient account since you will pay taxes on the profits you make but it gives you easier access to your money when you need it.
4) Invest in real estate. One of the main ways many American’s build wealth is through Real estate. Not only can it help you get higher returns on your investments which increase your profits, but it also allows you to do so in a way that’s tax-efficient and even tax-free. If you already have a decent chunk of money in your work retirement plans invested in index mutual funds perhaps you may want to diversify your invests a little and get started in real estate. You could start buying rental properties to increase your monthly cash flow and become an active investor who can write off taxes from your day job, you could start investing in crowdfunding deals or real estate syndications with other investors who focus on making money from apartment deals as a more passive investor, or you could simply start buying smaller properties and renting them out over time, or even just invest in some Real Estate Investment Trusts (REITS) which are like index mutual funds for real estate deals. There are many options available.
My point? The correct option may differ for each person. If you are young, haven’t maxed out your retirement accounts, and don’t need the extra cash on hand, perhaps putting the money into a Roth IRA or extra money in your job’s 401K may be the best option. If you’ve already maxed out your retirement accounts or think you might need this money before you turn 55, then perhaps opening up a brokerage account may be the best move. Although you pay a little more in taxes it may provide the flexibility you need to take the money out if an emergency arises. If you already have a good chunk invested in the stock market perhaps you should consider other investment vehicles like real estate. Contrary to popular belief, you don’t have to be rich to invest in real estate and there are many different options that may suit your lifestyle and risk tolerance best. Right now, I’m putting extra money into retirement accounts, but I plan to invest a lot more into real estate once I finish my residency training. Look into the different types of investment options and choose the one that may be best for you, keeping in mind that it may vary based on your life circumstances and net worth.