7 in 10 Side Hustlers Use Their Earnings to Pay Off Debt – Is This a Smart Strategy?

The extra income produced from a side hustle can be a great way to get back on good financial footing, especially if you’ve been weighed down by consumer debt, student debt, tax debt, or mortgage debt for quite some time and just haven’t been able to chip away at it. Undoubtedly, starting a side hustle to improve your financial situation won’t be for everyone, especially those who are already feeling overstressed (and perhaps showing signs of mild burnout) in their full-time roles.

Also, any extra income pulled in from side hustles will be taxed, likely at a higher rate, if one’s day job propels them into a much higher tax bracket, and such an amount shouldn’t be spent or used to chip away at debts. In any case, going down the side hustle route to climb out of debt is a smart move.

According to some self-employment data from Intuit QuickBooks, around 72% of those with a side hustle use their earnings to pay off debts. It’s an incredibly responsible way to make good use of the extra income coming in at the end of any given month. But is the optimal way to use the cash? And how should side hustlers go about paying off debts? Let’s find out.

Budgeting side hustle income is a must

It’s tempting to want to throw every penny that’s coming in at one’s debt load. And while it’s a wise move to aggressively pay down debt, side hustlers should carefully track money that comes in and out so that they’re not short when some sort of unexpected, urgent business expense arises. Indeed, for those lacking an emergency fund (which most experts believe should be able to handle six months’ of living expenses), I’d argue that contributing a portion towards one could also prove beneficial, especially in today’s highly uncertain environment.

Of course, setting aside a portion of cash for taxes is a smart idea. Nobody wants to be hit with surprise taxes, especially since they tend to accumulate interest, penalties, and all the sort. Planning taxes for side hustles can be tricky, especially if you’re going up a tax bracket or two due to the extra income that’s coming in. A financial strategist may come in handy for side hustlers seeking to delegate.

Don’t skimp on the emergency fund.

Furthermore, add the potential for Trump tariffs, which may be perceived as a colossal tax hike on Americans, and it makes sense to boost one’s liquidity by a bit more. Whether that entails beefing up one’s emergency fund beyond being able to cover six months’ of expenses (personal and business) or letting incoming cash sit in a high-yield savings account (HYSA) for a while before there’s more clarity on where inflows should go, it’s important to stay nimble as one’s budget gets a bit tight.

While it’s up for debate as to whether debt repayment should come before padding the emergency fund, I do think that a financial advisor could offer an invaluable second opinion for side hustlers who are looking to get out of debt without falling short in other areas.

Is the snowball or avalanche method better for paying off debt?

After budgeting for taxes, liquidity, and other areas, it’s time to strategize over how to pay off outstanding debts. The snowball and avalanche methods are quite popular for those looking to tackle their debts head-on. The snowball method entails paying off smaller balances first and aiming for those confidence-boosting “wins,” which can give you a psychological boost of sorts. Indeed, it just feels good to have fewer debts.

That said, I’m a bigger fan of the avalanche method, which entails going after the higher-interest debt first. Simply put, it makes the most logical sense, given it’ll save you the most in interest debts over time. Though I can’t speak to the motivational benefits of the snowball method, I do think that those with the primary goal of optimal debt repayment ought to use the avalanche method.

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