Understanding the “Why” behind Income Diversification
Ideally, no single income source is more important than another but none of us start there as often we are dependent upon the income derived from our employer or from our business.
When this income is disrupted however, we gain an immediate appreciation for why income diversification is so critical to maintaining our lifestyle.
What Are Your Options?
Building a variety of income streams is an essential part of your income diversification strategy. Some of us have more options than others of course. For example, applying “The 3% Rule”, for every $100,000 you have saved in the bank, invested properly, you can generate 3% income without touching the principal over time. So, that $100,000 nest egg could produce about $3,000 in annual income or about $250 a month. If you need $2,500 in monthly income, you’ll need a nest egg of about $1 million.
Therein lies the problem for most of us ~ we’ll never have enough saved to generate the supplemental income we need.
Assuming your nest egg isn’t large enough to produce the supplemental income you require, it’s time to consider another option.
Active Income
Active Income is a part time job or side hussle that requires your direct involvement. Working at a restaurant at night would be an example of a part time job and Ride Share apps would be examples of side hussles. These are considered Active Income options as there is a linear aspect to them. What do we mean by linear? Essentially, you get paid for the hours you put in - no more, no less. Today however, the rising cost of gas and the wear and tear on your vehicle makes Ride Share less attractive not to mention the dangerous situations those options entail. And, while Active Income is certainly a viable option, holding down a part time job to supplement the income you’re earning at your full time job isn’t all that appealing to most people.
Active Income may not be the ideal option for you given your current time constraints and the linear nature of active income lacks leverage. Is there another option?
Passive Income
Passive Income is really a hybrid requiring some active involvement initially but over time creates a hands off approach to supplemental income. Obviously, this sounds terrific but it does require a willingness to hone some skills that most don’t realize they possess.
Unlike Active Income, Passive Income is exponential rather than linear. What do we mean by exponential? Following the initial, active team building phase, you benefit from the actions of your team members. This creates a layered approach to your supplemental income and therefore has the potential to become exponential. Honestly though, most people are unwilling to do what is necessary during the active phase to make the passive phase possible. For those that do, the exponential aspect of passive income can, over time, replace active income completely.