One of the important lessons that should have been learned from the recent recession is that income diversity is an important aspect of your finances. With the massive layoffs seen in the economy during the recession, and the difficulty with finding a new job in a slow moving employment market, it is clear that relying on one source of income can be a real problem.
Income Diversity
When your income is diverse, it means that it is coming from different sources. For your family finances, this might mean that you and your spouse both work — even if one of you has a part-time job instead of a regular 9 to 5. Or, it might mean that a stay at home spouse uses the Internet to start a side business, selling products or services. The idea is that you have another stream of income so that if you lose one of your income sources, you still have money flowing to your bank accounts. This can reduce the rate at which you withdraw from your emergency fund, helping your money stretch further during tough times.
Income diversity doesn’t have to be all active income, though. There are ways to cultivate more passive streams of income as well. Many people find that dividend paying investments can be a good way to encourage income diversity. You regularly receive cash from dividends paid, and you can either reinvest that money, add it to your emergency fund, or even spend it. If you get a regular stream of income from dividend investments, or even from bond investments (you will get regular interest checks), you can use that to help shore up the situation if a job loss becomes a reality.
Other streams of income can include participation in affiliate programs online, receiving royalties from a book you have written, and even the wise use of an inheritance or other unexpected windfall. Before you spend that money, consider how some of it could be used to help diversify your income for the future.
Working from Home: Income Diversity
When you work from home, it is important to consider income diversity as well. As a freelance writer, I make money by providing a service to clients. Some clients pay more than others. However, I am careful to make sure that no single client accounts for more than 1/3 of my income. If I were to become too reliant on a single client to provide most of my income, it could cause real problems if that client could no longer work with me. Indeed, at the height of the recession, one of my bigger clients cut his order by half. Luckily, I had enough client diversity to be able to absorb the change while I looked for new business to fill the gap.
Bottom Line
You might have a job that provides the bulk of your income, but you should also have a back up source of income. No, a part-time job or a hobby business is not likely to replace the income and benefits you receive from a full-time job. However, if you pair income diversity with a well-established emergency fund (and, of course, unemployment benefits), your money will go further in a job loss situation, and you will have greater peace of mind as you search for a new job.
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You really got a point here. Especially in the actual economic background. It’s hard to find good and favourable situations, but not impossible. The first important step is trying and then never give up. I believe that income may be diversified even from hobbies.:)
I just did a topic on Diversifying, it is very important, not to put all your eggs in one basket, but not to stroll them all over the place at the same time.
Not sure about this one. Yes, of course, income diversity would be wonderful to have and has diversification advantages.
But the cost in terms of time and energy (if not actual money) for an uncertain or less-than-optimal return in trying to develop that income, and the loss of focus on what you were or could be doing in your “day job” has real consequences too. I think there is good reason to find that thing you’re good at, and really do it well.
(I’m a hypocrite in this case, but would argue I do different things for interest, not income diversification.)
Diverse streams of income are important as is smart spending. Spend on activities that you value the most. WRT to investing, don’t get discouraged with low yields today, they will rise in the future and offer more investment income.
Having a diver income is good if you have a set level of living expenses. The key to having a divers income stream is being able to make more than your monthly expenses while saving at the same time. It does take a lot of hard work and extra effort to get something going, but once you have that stream coming in, you won’t deny how sweet it is.
I disagree about two incomes, it is a trap for many families. Living off two incomes means that you have to maintain two incomes. If your family is living off one income and that income is reduced or eliminated both spouses can now look for work. Ideally we would live off one salary and save the other but sadly that rarely happens. So, we end up living a two income lifestyle and become trapped in the rat race of consumption.
We have dual income, a rental income, but minimal yield income. We’ve been mostly investing for growth. I’ll have to investigate more on yield income and adjust the investment accordingly. Another rental property would be really nice too.
I couldn’t agree more. One of my clients had recently made me an offer to work for them full time. I told them I would increase my time commitment to them, but that now that I have a diversified client portfolio, it just seems too risky to have just one client and phase out all the others.
You make a very valid point. Income diversity is HUGE, especially in this point in time. It’s hard to do because of the amount of time you have to put towards it, but it’s definitely very rewarding. I’m looking into multiple possibilities on increasing passive income to increase my savings.
To have a well diverse income is easy to say but hard to do. It also needs an equal amount of investment and energy. I mean, instead of having a single regular 8 hour job, you do a 3 4 hour part time job, that is income diversity but needs a lot of extra effort on your part whereas for investment, you need extra cash to have investments. If you can do both, then you are secured.