Diversification of Income
In this part of the series, let’s take a look at the diversification of income.
Diversification is the process of including more variety in a selection. You might have a diversified taste in music, meaning that you listen to different genres. Or you might have a diversified appetite and eat everything!
But when it comes to your finances, a little diversification can go a long way to achieving some financial security. Diversifying one’s income means having earnings from several sources rather than from just one source.
In these uncertain times, your income shouldn’t be dependent on one source. During the pandemic, employees were furloughed from their jobs, and for most of them, that was their only source of income, leaving them in dire financial circumstances. Individuals and businesses that were able to pivot and go into another area were the ones that were able to survive.
How to Diversify your Income
Today’s digital age is providing countless opportunities for multiple income streams for both individuals and businesses. Opportunities such as freelancing, courier services for ride-shares and food delivery apps, or even virtual assistant services create a lot of flexibility which allows for multiple income streams. Traditional brick-and-mortar businesses now have the opportunity to reach new markets outside their traditional geographical areas.
There’s no limit to the number of streams that you can have but the diversification should have a structure.
The diversified income streams can be passive or active, related or unrelated. A good portfolio should include a healthy balance across the categories.
Passive – this is a stream that works with little effort or no intervention from you. It can be investment income or selling online.
Active – this stream needs your active attention and effort. This may be your primary source of income like your job or business.
Be careful, though. If all the streams are active, you may not have the capacity to do them all. So, a balance between active and passive streams. If you have 2 active streams that require you physically if you get ill and are unable to be there physically, you would have lost both income streams. If one was passive, you would still have a stream available.
Related – this is a stream that is related to your primary source of income. It might be in the same industry or require the same skill set.
Unrelated – this is a stream that is not related to the primary source and is independent.
If all streams are related, there is still a level of risk of losing income if something negatively impacts that space. For example during covid lockdowns entertainment industries around the world suffered. All streams of income tied to that industry were lost.
The main benefit of diversifying income is to manage your risk of losing all your income. Ever heard the old saying “Don’t put all your eggs in 1 basket”? If the 1 basket falls you lose all your eggs. Spread the eggs across several baskets and the odds of losing all decreases.
Diversifying your income allows you to build wealth over time with reduced risk.
Stay tuned for the next part of the series for more guidance on achieving your financial goals.