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What to Do With Extra Income?

QUESTION: Tom in Idaho doesn’t know what to do with the income his new business is generating. The business doesn’t need any money to continue operating. Dave walks Tom right up the Baby Steps.

ANSWER: If there is no need to put money into it to grow it, then I don’t know why you wouldn’t take it all out and just call it income. You have to pay taxes on the money, so make sure you’re doing your quarterly estimates properly, but your after-tax income is your after-tax income. You say you could make $60,000 to $80,000 a year doing this, so what would you do if you got a $60,000 or $80,000 raise at your regular job?

You are at Baby Step 6, which means you’re out of debt with an emergency fund in place, you’ve got retirement savings underway, and the kids’ college is taken care of. So you are at the last Baby Step, which is to pay off your home. I’d pay off your house first, then I’d pay off your rental property. That’s exactly what I would do with it, wherever the money comes from.

The fact that it’s coming from a side job doesn’t change what you do with it. It’s just extra income that you’ve got. We’ve got some margin in our life, so what are we going to apply it to? Pretty quickly, I’m going to apply it to you getting your home paid off.