Diversifying one’s income

19 Jul, 2020 - 00:07 0 Views
Diversifying one’s income

The Sunday Mail

No matter how long you have been at a company, or where you are in your career, losing your job is always a possibility with full-time employment.

Whether it’s because of industry changes, market downturns, COVID-19, or a disagreement with your boss, the impact still can be devastating. How can you protect yourself financially? One way is to diversify your sources of income.

What does it mean

to diversify income?

A diversified income has more than one source. You may be familiar with the concept of a diversified investment portfolio, which is recommended to limit risk.

A diversified portfolio has investments in different asset categories, such as equities, fixed income, commodities, and cash. It also spreads out the holdings within each asset category.

The same idea of spreading your exposure can also apply to the ways you earn money, even while holding down a full-time job. Whether you are early in your career, are thinking about leaving a full-time job to start your own business, or are nearing retirement, there are plenty of ways to diversify your income.

Benefits of diversifying

your income

Angela Moore, a Certified Financial Planner, is the founder of Modern Money Advisor, a fee-only financial planning firm. “Diversifying your income can help provide stability and hedge against income loss due to layoffs, illness, disability, discrimination and more,” Moore said in an email interview.

“In addition, having multiple streams of income can have an incredible impact on your ability to build wealth and/or fund retirement.”

Diversification

in a recession

Beyond providing some “income insurance” if you lose your primary employment, creating multiple streams of income can be a path to financial independence. According to Sarah Stanley Fallaw, co-author of “The Next Millionaire Next Door,” “looking for multiple sources of income is a prototypical millionaire-next-door type of behavior.”

No matter what your financial position is today, there are plenty of opportunities to explore.

Active and passive income

There are a number of different types of incomes, but they all fall into two categories.

Active income is earned from a job with an employer or from running your own business.

Passive income, such as from rental property, royalties, or investment income, pays you even while you sleep. Here’s why the second category is important for you to consider for diversifying your cash flow.

If you are diversifying by making extra active income, there is an ongoing time commitment. Side hustles like driving for a ride-sharing company, pet-sitting, or consulting all require you to labour to supplement your primary paycheck in off-hours.

However, if you are diversifying with passive income, you can still pursue your primary line of work while earning money at the same time. Be aware that building passive income may involve a significant initial investment of time or money. Rental income for example, is passive, but it requires buying a property and ongoing maintenance and administration.

What you can

do to diversify

Web-based businesses are one low-cost way to build passive income. Creating your own website can be a tool to generate passive income from advertising, referral fees, and the sale of products and services.

Platforms like Shopify make it easy and affordable for anyone to create and manage an online store. The big investment is the initial time it takes to research your idea and build a plan.

Helen Buttery, who leads special operations for American Writers & Artists Institute (AWAI), a company that helps people to develop content-writing and online business-building skills, explained this model.

“Web-based businesses can be a great source of supplemental income. You can create the site at home and let it work while you are employed or working on other projects. The site can be on any topic, so you can pick subject matter that matches your interests,” Buttery said in an email interview.

“The key to success is matching your interests with a large-enough internet audience and making it easy for them to find you,” she said.

Drawbacks of income diversification

One of the few constants in life is that there are only 24 hours in a day. If you take on a part-time job, such as being a ride-share or food-delivery driver, to diversify your income, you are going to have less free time for other things. It also doesn’t pay to diversify your income if the effort costs you your full-time job and you need that salary to survive.

Make sure the added demands of your part-time job or other passive business activities don’t negatively affect your job performance or endanger your health.  — The Balance.

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