There was a time when all you really needed was one well-paying job and a solid retirement plan to secure your financial freedom. Things are a lot different these days.
For starters, the job market itself is more competitive than ever. Even if you do end up bagging the “dream” job it will hardly be a cakewalk, let alone something you can rely on forever.
Where people used to become “part of the furniture” around the office and spend 40 years working for one employer, nowadays only 4.1 years per employer is typical. And that’s before COVID-19…
Some would say that’s not necessarily a bad thing, and for the most part, I agree. Change usually comes with a positive outcome, like for instance, a pay rise when you get a new job.
But what if there was a better way? What if you increased your number of income sources instead of the amount you get from one source?
It’s easier said than done, but having multiple sources of income can take you one step closer to the financial freedom you’re probably chasing.
In this post, I’ll explain some different types of income streams and how you can build your own.
Wait. Why Do I Need Multiple Sources of Income?
By diversifying your income, you’re adding more and more ways to earn money. Even if one source stops working, you have at least another as a backup.
If you’re like me, this takes away the stress that comes with having a single point of failure. It also allows me to make better long term business or investment decisions.
You don’t want to be in a position where you need to make cash immediately as this can sabotage the long term success of your business or investment strategy.
Potentially more important, having multiple sources of income, whether active or passive, allows you to have more fun. It gives you the opportunity to play in higher risk, higher reward zones, where you’re more likely to learn too.
Never depend on a single income. Make an investment to create a second source.– Warren Buffet
You may think having a 9-to-5 is the most secure way to go about earning your money but that’s far from the truth. You’re heavily reliant on only one source of income without a backup plan.
I’m not sure I’d call that financial independence.
With multiple income streams, your security isn’t tied to a single paycheck. It’s the financial equivalent of not putting all your eggs in one basket.
Even if your business doesn’t work out or your company decides to throw in the towel, you’ll still have an other income source to keep you afloat.
Earning More in Less Time
We’d all love to earn more money but in the corporate world, this usually means taking on greater responsibility, possibly a longer commute and most likely more hours at the office.
Depending on the circles you’re in, there’s a generally accepted notion that you’ll only be able to earn more money if you put in more time.
But what if you have a passive income stream? You’re still spending almost the same amount of effort and energy and earning more income on the side.
Now, of course, getting started will cost you some time, but there’s no reason why your new income streams won’t give you the opportunity to work fewer hours in the future.
What this all adds up to is financial freedom. This means different things to different people but is technically defined as “having enough income to pay one’s living expenses for the rest of one’s life without having to be employed or dependent on others”.
A better summary of what we’re talking about here is simply “having options”. Want to:
- Take a year away from all distractions to launch that product you’ve always wanted?
- Move to Thailand for 6 months for some intensive Muay Thai coaching?
- Work part-time for a year after your child is born?
- Spend a year volunteering in South America?
When you have multiple sources of income, these are a possibility, but with a 9-5 job and an employer who relies on you, they most likely aren’t.
This may sound like a dream, and true financial freedom can take a while to learn and make happen. But if you’re willing to reduce your expenses, a little bit of freedom is not that difficult to achieve.
Types of Income Streams
There’s no one size fits all approach here. Your personality and money mindset will absolutely come into play, as well as your age, responsibilities, current assets and liabilities.
Before you dig deep, researching how to set up multiple sources of income, you’ll need to understand the importance of every type of income and the purpose they can serve.
While some are more rewarding than others, unless you happen to have a great deal of wealth already, chances are you’ll want to set yourself up with a “blend” of these, which will change over your lifetime.
Your active income is everything that actively involves your time and energy. For most people, this could be a 9-to-5 job, consulting or freelance work, or working on your business.
For most, active income is in the form of a salary, but it can also incorporate earning dividends, or equity. It can also include growing the value of your equity as a business owner, in preparation for a potential sale in the future.
If you’re familiar with Robert Kiyosaki’s cashflow quadrants, active income is used to describe the employed and self-employed – when you work for money.
Where most businesses aim to scale up rapidly and reel in the big money, a lifestyle business takes a more relaxed approach. In simple words, a lifestyle business supports your way of life and can be as big or small as you choose.
For some, this can be a simple side-hustle that pays the rent. For others, it may be the income needed to pay for a month long luxury vacation every year.
I hear you asking, “isn’t this active income?”. Yes, no, maybe. Lifestyle income tends to sit between active and passive income. A lot of people call this “residual income” – when you continue to get paid after doing the work once. I’d argue that lifestyle income is just very efficient in the time that it uses.
So if it’s not passive income, sure, you’re actively working to earn it, but your effective hourly rate is much higher than anyone would pay an employee. The focus here is to have a business that covers your needs and desires with time efficiency and location freedom.
For most people I know (myself included), lifestyle businesses are the stepping stone to time and location freedom. It often begins as a side hustle, and in time eclipses active income, allowing any surplus to be invested in passive income.
A truly passive income source is one that doesn’t need your time or effort. If you take a year off of work is or die, it keeps paying.
Unless you plan to turn your business into a true enterprise where you are simply a silent shareholder who gets a dividend check every once in a while, the most common route to passive income is by investing surplus income.
Some common sources of passive income are:
- Stocks (including ETFs and publicly traded funds)
- Real estate investment trusts and real estate syndicates
- Bank interest
- Mutual funds and other privately held portfolios
Many financial bloggers will mention investing in websites, but if someone else isn’t operating them on your behalf, don’t fool yourself. Even the simplest websites will need attention. Though some can be semi-passive, you’re best off considering them in the lifestyle income bucket.
Multiple Sources of Income: How Many Is Too Many?
When it comes to having multiple income streams you would naturally think “the more, the better” right?
While it sounds great in theory, things work a little differently in the real world.
Everyone’s going to have a different perspective here, but I find that 3 to 5 sources are best. “No fewer than 3, no more than 5” is a general rule I’m really beginning to appreciate.
Why no more, you ask? It’s important to have some form of focus!
A well-planned share portfolio needs re-balancing. If you have a lazy portfolio with 3 different ETFs, that’s a relatively quick task. If your portfolio holds 20 different stocks or funds, that’s going to take a lot longer.
Even completely passive income streams demand time, energy, and attention.
I’ve made this mistake when operating multiple websites (entirely on my own). There’s a point where you just can’t do everything well and something ends up suffering.
As my goal for having different income sources is not only for security but also for freedom of time and easier sleep at night, I prefer fewer sources of income that let me balance my lifestyle and work-life well.
Of course, your personality and goals may lead you to a different conclusion.
Expenses and Risk
Before learning how to set up multiple sources of income and potentially committing to different investments (either through time or money), I encourage anyone to spend some time thinking and learning about risk.
I remember when I first started to hear the team “risk” in relation to investments, none of it made any sense. I really don’t feel as though it’s explained well enough to those of us who don’t have a university degree in finance.
An exercise that helped me to understand risk is to associate an income source with an expense, then considering the importance of that expense.
Below are some examples of expenses and income sources that often match up for some people. The thing to remember is that everybody’s perception of risk is different.
A day job may feel safe to you, but may feel very risky to an entrepreneur. Where a dividend-paying ETF may be a low-risk source of income to your friend, you may feel the complete opposite.
Low Risk / High Importance
On this end of the spectrum are the bare essentials that you need to live — your “fixed expenses”. Some common examples are:
- Paying rent
- Feeding yourself and your family
- Heating and electricity bills
- Medical expenses
These expenses are of high importance, so what income source do you attach to them? The lowest risk income possible.
For many people, this is some form of active income, as a salaried job. I on the other hand prefer to relate passive income to this category as, even if I have to stop working it keeps paying for my families’ expenses.
Medium Risk / Average Importance
In the middle of the range here are the “nice to haves” — simple luxuries. Depending on your culture and level of affluence the list will vary but some examples are:
- Eating at restaurants instead of cooking at home
- New furniture
- New cars
- New sporting goods
If you don’t get too carried away here, you can see how these are of average importance. It’s nice to have new furniture, but it’s not as though you’ll die without it.
This affords you more risk in how you pay for these expenses. Maybe that is in the form of a lifestyle business?
High Risk / Low Importance
On the other end of the spectrum are the things that barely matter. Is that $20,000 carbon road bike actually important, or is its core purpose to show everyone how rich you are? (NB: Not hating on bikes, I love them!)
We’re all living in different scenarios, so what may be of low importance to me may be very important to you. Some examples of things that I appreciate but know are not particularly important include:
- Electronics and gadgets
- High-end sporting goods
- Luxury travel
Unless you’re playing high stakes games with the super-rich and have “a reputation to uphold”, the only thing that will hurt if you can’t afford them is your ego.
This is a good thing, as if they are of low importance, you can assign your riskiest source of income to these expenses.
For more on this idea of assigning certain sources of income to different clusters of expenses, my post on entrepreneurial investments and “income clustering” might help.
How To Create (And Balance) Multiple Sources of Income
For me, 3 (streams of income) is the magic number. It lets me focus on my financial goals without disconnecting from the things I truly love.
Technically I have more than 3 at the moment and this has been in a state of change for the last few years. I assume this will change again in the future as my businesses and investments mature, but when I’m planning I only pay attention to 3 at any one time.
If you manage to make your income streams truly passive, you can then begin to add more. At least from my perspective, you don’t want to be in a position where you don’t have enough time for any of them.
This next part is a bit of a thought exercise and is advice I’d give to a younger self if I had an opportunity to do life over again.
One Active Income Source
Find yourself a great active income source. This is most likely in the form of a full-time job, but could also be through freelancing or consulting. You’ll be spending most of your time and energy here short term, so it’s important to choose wisely.
This active income source won’t just serve as a salary but also as an exit strategy. To create passive income from a share portfolio or earn from a side-hustle, you’ll need the backing of your active income source. This either gives you money to invest, or time (runway) to build.
Don’t be in a rush to build a business, however. Instead, do what it takes to increase your primary income first.
With a strong active income source, you can build new sources of passive and semi-passive income. Then the day will come where you can move on, quit your day job, and turn your side-hustle into a main-hustle (you know what I mean).
Again, don’t be in a rush. Only do this once it starts generating enough revenue to cover at least your fixed expenses, if not more.
Build a Side-Hustle/Lifestyle Business
To develop a second source of income, you’re going to need a side hustle, or better yet – a lifestyle business.
It’s really easy to get sucked into something new here, but if it’s money and the freedom it can bring that you seek, the best place to start is with your current experience.
What I’m saying is, leverage the skills you already possess.
As this isn’t a full-time gig yet, you don’t want this business to be directly selling your time, as your active income source does.
Aim to build out a lifestyle business that can be well established in a niche, is scalable, and has the potential to reach many people at once. Better yet, just follow MJ DeMarco’s “CENTS Commandments”.
Create a Passive Income Source
With two sources of income in place, you should be earning more than you need to spend. This residual income is an opportunity to be saved.
But don’t just let it sit there and slowly inflate away. Instead, build a portfolio that earns passive income while you sleep.
This can be as simple as a portfolio or REITs, dividend stocks, municipal bonds or maybe something more complex like buying income generating assets that others operate on your behalf.
Once you have a stable passive income rolling in, you could put it back into creating another business or income stream, to remove any active income from your life.
Income Streams That Serve a Purpose
Keep in mind, this is just one man’s thought exercise. When it comes to earning from many income sources, there really aren’t any rules.
What works for me may not work for you, so be careful to read this and other articles with a healthy dose of skepticism.
There are plenty of income generating assets out there to choose from, but only a handful of them may be the ideal fit for you.
What works best for me, however, is to be clear on what this income is for before simply deciding to set the goal of more.