“How can I pursue my passion without jeopardizing my financial security?”
Even if you love your job, you probably have something else that you’d rather do. Maybe you always wanted to learn to play the piano. Maybe you have an idea for a small business. Maybe you’re curious about a branch of science or technology that’s adjacent to what you do for a living, but not exactly the same.
Whatever your dreams may be, it takes careful financial planning to make them a reality. Your financial and tax professional can help you get started by saving for start-up costs, setting a budget and understanding the tax implications if you earn income from your side project. If your passion project turns profitable, he or she can help you set it up as a business, guiding you in areas like offering a benefits program, hiring employees, buying or leasing space and even raising capital for expansion.
Some of the biggest companies in America started out as passion projects. Steve Jobs and Mike Wozniak created Apple by tinkering with computer equipment in their garage. Mark Zuckerberg launched what would become Facebook from his dorm room at Harvard. Could your passion project turn into a successful business? You’ll never know until you try.
The benefits of passion projects
Working on a passion project gives you a break from the daily grind, allowing you to focus on ideas or skills that excite you. That can make you better, more creative and more ready to work on your real job. That’s why some tech companies dedicate a certain amount of time1—say one Friday afternoon a month—to allow employees to work on whatever they want to. Some of these ideas become business lines, but others simply refresh employees and give them new focus.
How to get started
If you’re ready to start pursuing your passions, talk to your financial professional about these steps:
Find your passion
Have you ever noticed how, when you’re doing something you love, the time passes without you even noticing? Think about the activities that absorb you the most and that you think about when you’re doing something else. Think about the life you dreamed for yourself when you were seven or eight years old. Those are your passions.
Decide whether it’s a hobby or a business
Not all passions can be businesses. Unless you’re well over six feet tall, for instance, you’re probably never going to make a living as a basketball player. However, sometimes you can create a viable business around your passion. Maybe you’d enjoy coaching a kids’ league or selling and reselling basketball memorabilia. But be honest with yourself about how much money you’re ever likely to make at your passion. Make sure you’ll have enough to live on from it—or other sources—while you pursue it.
Don’t quit your day job
Many people pursue their passion project while still working at their current job. That gives them a stable income, benefits and a network of business and professional contacts. You should only quit your job if you’re already making enough money to cover your living expenses from your passion project.
Save for start-up costs
Even if you’re making a living salary from your passion project, you may need extra cash at the beginning to buy equipment, rent space and advertise for customers. Ask your financial professional to help you estimate how much you’ll need and develop a plan for saving it gradually over time.
Set a budget
Money may be tight when you first start launching your business, so work with your financial advisor to create a workable budget for living costs and the expenses associated with your passion project. Understanding how much you can spend—and sticking to those limitations—can increase your chances of long-term success.
Understand tax implications
If your passion project generates significant income you’ll have to pay taxes on that income. Self-employed individuals have to pay2 both halves of their FICA taxes, that’s 15.3%, plus federal and state income taxes. As a result, most experts recommend setting aside anywhere from a fifth to a third of your gross receipts for taxes. If you make enough money that you’ll own $1000 or more on your side project’s income, you’ll be required to file estimated taxes quarterly. But on the positive side, if you have income from your passion project, you can deduct the cost of business expenses from that income. One caveat: if you have negative income from your business for three years in a row, the IRS may classify it as a hobby3 and prohibit you from deducting expenses or declaring a loss. Talk to your tax advisor about your options.
Know when it’s time to take the next step
A side hustle can be something you do for your personal pleasure, or it can turn into a business. If you’re earning more from your passion project than your salary, it may be time to consider making the commitment to it full-time. Your tax professional can help you set up your business as a legitimate tax entity, guide you on tax and recordkeeping requirements and advise you on providing employee benefits to yourself and your employees. If your business is really successful, you may need assistance, later on, with raising capital from venture capitalists, private equity investors or an IPO.
Make your dreams a reality
Passion projects can be large or small. They can refuel you creatively, enable you to think outside the box and even create a profitable business that aligns with your favorite activities. Talk to your financial professional about building a financial foundation for your passion project.