Are you looking for motivation to start a side hustle and make more money? Give mental accounting a try.
Mental accounting is the practice of assigning specific income you receive to specific expenses or to specific goals.
For example, let’s say I want to go on a $3,000 trip, but I don’t have room for that in my current budget. If you can find a new source of income to fund this trip you don’t have to worry about your current budget.
Instead you can earn money outside your regular job to put towards your vacation fund. Maybe you freelance write, take up a part-time job in retail, or even managing social media accounts for companies. That’s the practice of mental accounting.
A Real Life Example of Mental Accounting
I started Young Adult Money, admittedly, to make side income. It took me 8 months to make any money on the site, but I’ve made consistent side income ever since.
While side income is nice, it takes a lot of motivation to actually make it happen. The motivation for me was our student loans. Instead of complaining about having a large student loan payment going out the window every month I decided to take action.
I now make enough in side income to cover our student loan payments; the monthly payment is completely offset by my website income. My next target is our monthly mortgage. How nice would it be to have your mortgage and student loans completely paid off each month through an income source other than your full-time job? Visualizing this reality has motivated me to stick with my side income pursuits.
Getting Started with Mental Accounting
I think if most people are honest with themselves, especially 20somethings, their dreams are bigger than their income. By that I mean most people aren’t going to land a job that pays over 100k a year. Beyond that, far fewer will ever own a successful small business.
Despite this fact, most people want a beautiful house, reliable cars, investments that give them passive income, and the ability to travel the world. While frugality does help achieve these goals faster, you’re going to have to make more money if you want to live a certain idealized lifestyle. That means some sort of side/business income.
No one wants to come home after a full day and work. Nor do 9-5ers want to spend their weekend grinding. Side income doesn’t have to take all your free time if you work smart, but it will be a sacrifice in terms of time, sleep, and energy. You need something to motivate you to pursue this additional cash flow. Get motivated by thinking about how you will use your additional cash flow:
- Offset your monthly student loan payment
- Offset your monthly mortgage payment
- Offset your monthly car payment
- Fund amazing vacations (for this one – also see my post on 5 Creative Ways to Pay for Travel)
- Put it towards a down payment for a house
- Put it towards a down payment on a cabin/vacation home
- New laptop/TV/tablet/etc.
- Use it to invest in dividend-paying stocks for passive income
This list can go on and on, but I think you get the point. You have dreams and goals. They require money. Your current income level makes them unrealistic. Use mental accounting to get motivated to make more money.
Making extra income can be as easy as working a part-time job a couple nights a week or picking up some weekend shifts to supplement your income. This may be a good place to start if you need money ASAP or are thirsty for side income, but long-term I would recommend you pursue one of these two side income options:
- A Small Business or
- Work that allows you to develop your skills
The benefit of a small business is that you can sell it for a lump sum down the road. I got an unsolicited offer for this website last December, and it was a material amount of money (to me at least!). With businesses you can either take the cash flow each month or sell it if you are sick of running the business.
It’s also become easier to manage a small business from anywhere in the world. Choosing the right small business that gives you the flexibility to still work a 9-5 job is key in this case, otherwise you’ll hit a wall pretty early and not be able to develop the company to any significant extent.
The second option, income that helps you develop your skills, can be a great option if there is some skill you want to learn and develop for your career or eventual small business. I did some spreadsheet consulting for a small business (read about my experience here and avoid some of my mistakes!) and it was a great setup. I was able to develop my technical skills outside of my full-time job – and make money doing it! If you can find clients, this might be a good way to go.
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I wrote an entire post about what motivates me to work hard in my 20s, and I think each and every one of us has goals in life that can motivate us to work hard and make more money. If you have big goals – or even small ones – that require money, consider using mental accounting as a tool to help you get motivated to make more money.
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Hey DC, great point about the mental accounting. I’m curious, do you use your online income to send extra money to your student loans then, or is that just where the money comes from to make the payment? I think I might be tempted to increase the amount going toward the student loans in order to get them paid off faster, but that’s just me.
We are thinking about starting to do this next month with my blog income toward the debt. We’ll see how it goes!
Very cool that you’re able to take income from the site to cover your student loans. We do mental accounting with what the site is making as well and throw pretty much everything at retirement and our vacation fund. It helps keep me motivated when I’m feeling burnt out and allows us to focus what we’re making with the business on other things.
I have never heard of mental accounting. Great post DC and I agree with it 100%
That’s a great way to think of the extra income. Some times I just think of it in general terms…having extra money or savings but that probably doesn’t motivate me as much as if I had a specific goal in mind.
I know that for me, when I’m mentally accounting for something like a vacation (which is fairly immediate), I’m a lot more motivated than if I’m mentally accounting for a downpayment on a house (which is just so far off). Definitely something I need to work on.
I think this is a great concept! I think it’s awesome that you’re using blog money to pay off your student loans instead of complaining about them. Way to be proactive!
I always work with clients to visualize what their financial choices will look like. It is so much easier to work towards something if you know what it looks like otherwise you are just operating in a fog and you will get lost along the way.
I think most young people, aside from you of course, don’t think that way. When they want all the things they think they are supposed to have, they pull out a credit card or finance it. From experience, I can say that is NOT the best way. Your way is much better. Now we can actually afford lots of things we couldn’t before, but I still use this method for things like trips or ski passes. It’s a great motivator if you think about paying for expenses with non-salary income.
DebtRoundUp I’m glad I could share the concept with you. Also always nice to hear that other bloggers agree haha.
Andrew LivingRichCheaply I don’t think it’s bad to just think of extra money in general terms, but I have found that when I have a specific goal – especially a big one – I can keep myself motivated through the ups and downs better than if I just have a general goal of extra income.
brokeandbeau I’m with you on being more motivated for immediate goals. While I will be paying off student loans for a number of years, it’s also an immediate need as I’m making monthly payments on the debt. The immediate impact on my finances of offsetting those payments definitely helps keep me motivated.
blonde_finance Great point, Shannon. I think visualizing both short-term and long-term goals has helped me stay motivated and helped during times where I want to simply give up and spend my free time as I please.
Eyesonthedollar I think a few things are driving young adults to not think this way. One is that you feel like you have a LONG time ahead of you before you retire. Another is that we anticipate – and expect – to make more money as we gain experience and get older. This allows young adults to justify not saving or not lining up their income to expenses to the extent that they should be.
Great post, DC. I think mental accounting is really important and powerful motivation. It’s not just 20-year-olds whose income doesn’t cover the cost of their dreams. :) Some just keep dreaming while others do something about it. And I think when you have mental accounting – that goal you really want front and center – it makes much less painful to do the work necessary to make it happen.
Love this post, DC! Just like you, I started Financegirl as a side hustle to take action because of my student loans from law school. I also babysit as a side hustle. The little bit of extra income makes a huge difference, and mental accounting is undoubtedly a motivating tool. The idea of my side hustles covering my entire student loan payment is amazing and would be incredible; definitely the goal!
“…their dreams are bigger than their income.” So true, at least for me! Earning extra income can really help in achieving goals that otherwise wouldn’t be possible. Speeding up debt repayment is highly motivating for me. Developing new skills along the way is a great bonus, too.
Excellent post. I am one of those people with the big dreams. That is exactly why I started doing my side hustles. Paying off my debt and traveling are 2 of the motivating factors for me.
I’d have to agree. If you’re looking to really live the life that most of us know we want, we have to make some sort of side income. I ended up getting lucky. I started my blog for side income which lead to clients, which lead to a business, now I work for myself full time. However, it did take tons of motivation to get it done. I worked every day for over 2 years straight!
I like the idea of motivating yourself by picking attainable goals, like covering your student debt payments. Congrats on this achievement. Being able to cover your mortgage too would be some serious side income. Looking forward to hearing about your progress!
ShannonRyan It definitely makes the work less painful. If you aren’t working towards something it can make work a serious drag.
JourneytoSaving I’m definitely on the same page as you. Making extra money to pay down debt and reach otherwise unreachable goals definitely can be motivating.
Jason @ The Butler Journal Those are two of my main factors as well. I always have some goal that I’m working towards that helps keep me motivated.
Green Money Stream Thanks! I am trying to stay as motivated as I can to continue to grow my income and cover more and more of my debt payments.
I think if I had a full time job I’d think this way about my side income, but since I freelance any income goes as freelance income, if that makes any sense? Sometimes that side income helps me get over my projected income (yay!) and sometimes it helps me reach the projected income number if I didn’t make enough with video editing work (boooo!). I love the concept though…it gives the hard work purpose!
Nice DC, congrats on the side income :).. You really are a motivation, I feel I am focusing too much on the content and not being strategic enough with my site..
Looking forward to helping you grow
Beachbudget What you are saying totally makes sense. If my full-time income was from freelance work my mental accounting concept probably wouldn’t work as well. I suppose you could start an additional freelance/side hustle money stream, though, even if your main money comes from freelance work? Anyway I hear where you’re coming from.
Right now, my freelance money is covering our gas, groceries, and utilities. It certainly helps me see a finish line at the end of the month, and when I can cover more, I get beyond excited!
fitisthenewpoor That’s awesome! I hope to add some more freelance money sometime within the next couple months. I only freelance on one website but I’d love to have 3-4 a week.
When The BF and I were choreographing on the side for extra money, all of the money I earned went straight to my emergency fund. Mental accounting takes the thinking out of achieving goals.
I think it’s amazing that you’ve managed to grow your online income to a level that covers your loan payments! Setting targets is fun and can really be motivational. I’d love to be able to say I can cover something with my online income, but for now, what I cover is random stuff I like to buy! I’d love to be able to pay for our next vacation with online earnings, but they will REALLY have to ramp up, or I won’t be able to afford to go on the vacation. (That’s kind of a lie, taking the specific vacation would be at the expense of some of our savings goals for the year.)
LisaVsTheLoansThat’s a great quote -> “Mental accounting takes the thinking out of achieving goals.” It really does simplify things and matches your effort with specific goals.
Ugifter Ironically right around the time I published this post one of my income streams had a drastic change so I need to rethink how to continue to bring in the sort of income I have been with the blog. Probably take a few months to evaulate things and make a new plan of action.
If I hadn’t won the Hawaii trip I definitely wouldn’t have been able to justify it!