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True Wealth: Diversifying Income
A wealth of information has been written on diversifying one’s asserts. This is very sound advice. However, very little has been written on diversifying income. The diversification of income is one of the Five Pillars of Wealth. The Five Pillars are covered in the book, Wealthy Child: Financial Success for the Children in Your Life.
The reason that assets should be diversified is so that what one asset, or asset class, is performing poorly the other asset, or asset classes, are most likely performing relatively better and propping up the poor performer.
Most of us have a huge financial risk and that risk is that our income is reduced or disappears entirely due to downsizing, layoffs or health issues. How long could you go if your wage income dropped to zero?
The best to protect against this risk is to create multiple sources of income that are unrelated.
This way if the income from your job is reduced or eliminated your other sources of income will provide income to tie you over while you adjust.
The best types of additional income streams are those that are unrelated to your primary source of income. For example, if you are a computer programmer you’ll want a source of income that is entirely unrelated to the computer and programming industry. If you had additional income from a small business that sold handmade holiday decorations online this would be a very unrelated business and source of income.
For those who do not have substantial amounts of free time to devote to additional enterprises unrelated passive sources of additional income are key. A passive source of income does not require work by you on a daily basis. An example might be a rental property that you own. Yes, you may have to devote several hours from time to time but generally you will need to “work” on the property five days a week. This income is essentially passive.