Diversify Your Income Sources

Everyone talks about diversifying your investments. Few people talk about the equally as important job of diversifying your income sources to create passive income. There is nothing more dangerous than relying upon one or two employers to support your household's income needs. Job security is an illusion. In fact, I would go so far as to say a small business owner who has the flexibility to enter new markets or adjust his cost structure, provided he or she has the financial knowledge to make wise decisions, is in a far less risky situation than a school teacher who could be laid off due to budgetary concerns.

Working to diversify your income sources is important to your investments because it is often those who have been laid off or who have experienced a substantial pay cut who are forced to dip into the retirement accounts, pay early withdrawal penalties, capital gains taxes and income taxes, and fees (not to mention the loss of decades of compounding that could have occurred if your money remained safely in a 401(k), 403(b), Roth IRA, Roth 401(k), SEP-IRA, Simple IRA, Traditional IRA, or comparable retirement account). In fact, it is telling that during the Great Recession of 2007-2009, some of the most popular pages on the Investing for Beginners site had to do with hardship withdrawals from 401(k) accounts and ways to avoid the early penalty fees and taxes associated with tapping into an IRA before retirement age.

When you first start out on your journey to investing, it is likely that most, if not all, of your household income will come from your primary job. That is, you sell your time in exchange for money. How much you earn per hour depends upon your skills - you hourly rate will differ depending upon whether you are a doctor, construction worker, nurse, janitor, or professor because of supply / demand considerations. This is a perfectly satisfactory state of affairs.

As time passes, however, you should be doing everything in your power to diversify your income sources by using your money to purchase investments or creating intellectual property that pays dividends. If you are a corporate lawyer, ten years into your career, you should own the car washes in town or, perhaps, the storage units. If you are a professor, you may have used some of your salary to acquire billboards throughout your city so you can earn advertising revenue. The exact specifications will come down to 1.) your personal interest, 2.) the economy at the time (some assets will be cheaper than others due to the cyclical nature of capitalism), and 3.) the percentage of your income you are able to devote to growing your investments.

Over time, the power of compounding will do the rest. This is true regardless of how successful you are or how high your income is - after all 78% of NFL players are in financial distress within two years (2 years!!!) of retirement.