Nigel is the founder of NOW Economics where he provides insights and unique perspectives on personal finance, investing, business, career and education. (www.noweconomics.com - IG @now_economics)
• How to develop multiple streams of income
• The difference between active and passive income
• Methods to earn income:
o Being an Employee
o Business Ownership
Most people only have one stream of income and that source is usually a salary or wage from working a job. This puts you in a risky financial situation because if that stream of income goes away you are in trouble, especially if you do not have a sizeable cash savings to fall back on. Working for a wage or salary is the hardest way to earn income and is known as active income because you are trading your time for money.
To be safe, I recommend trying to develop at least three streams of income. This can come in the form of salaries/wages, investment income and income from side business(es) you are involved in.
Investment income is the profit you receive from your investments. This can be made through receiving interest payments, capital gains (profit made on the sale of your investment) and dividends (income you receive from a company you hold shares in).
My development of income streams
I currently have two streams of income: my salaried job and investment income. The area I am trying to develop is income from a side business venture, with the goal of becoming the principal owner of the business. I've started a personal blog and while this blog does not currently provide me with any income right now, it does have the potential to be monetizable in the future if I am consistent and develop a strong following.
In addition, I will be developing more skills and knowledge in my profession to potentially consult businesses on my expertise in corporate finance and strategy.
Another way to develop an additional income stream that can come right away with less risk is getting a part-time job. It may not be as scalable (i.e. does not have the potential to grow) as starting a side business, but it does offer guaranteed income in exchange for your time. The downside to this is that you forfeit the time you could be dedicating instead to starting a business.
Not only will developing multiple streams of income reduce your financial risk, but it could also exponentially increase your yearly income!
The types of sources of income you aim to receive will depend on your personal situation and you should evaluate this before you try to incorporate these streams into your financial life.
Some people need more cash immediately and may be better off working a side job, while others have more available time and capital (i.e. money), which is suitable to starting a business venture. Some professionals may be earning a very high salary due to their expertise and experience, but should then invest these earnings to receive investment income.
"Earning more investment income than income from your salary and side business is the ultimate goal because you are having your money work for you."
Observe wealthy individuals - Passive Income
If you observe wealthy people you will notice that many of them have over 5+ sources of income. Many of them are involved in multiple investments in private businesses, real estate, stocks (ownership of a company bought through shares), bonds (money loaned to a company, a type of I.O.U) and are usually the principal owner of a business they started or moved up in. This is known as passive income and is the best scenario to be in!
Earning more investment income than income from your salary and side business is the ultimate goal because you are having your money work for you. You are no longer trading your time and effort for money. This is true financial independence.
I know a wealthy man who receives over six figures a year in dividends alone, which are like bonuses paid to investors who hold the investment on a long-term basis. Imagine being in that scenario, earning over $100k just from sitting home and managing your investments! That is the ideal scenario and one of the reasons why I am obsessed with personal finance and investing.
The Bottom Line
Aim to develop as much passive income in your life and work towards a situation where you do not need active income such as being an employee or self-employed.