This is a guest post by Joel, who shares his thoughts on the importance of multiple income streams and how to develop them.
Quick! How many streams of income do you have? If your main source of income was to dry up over night then what would you fall back on? If your answer to the first question was “One” and your answer to the second question was “Umm…” then this will be an important post for you to read whether you are self employed as a freelancer or firmly entrenched in corporate America.
My goal is to show you why creating multiple income streams is a smart risk management tool as well as share a few ideas for starting businesses that can provide those multiple income streams, and of course hopefully provide a useful how to guide so that you can have some concrete information to help you decide the best way for you to start creating some of your own multiple streams of income.
Safety in Diversity
Just as many financial planners and portfolio asset managers preach the benefits of a diversified investment portfolio I would like to take that concept a step further and apply it to not just passive income from an investment portfolio but also to your active income/earned income from your job or business.
The reason that many planners are so hyped up about creating a diversified investment portfolio is because diversifying is a great tool for managing risk. Diversifying allows one to “spread out the the risk” across the overall “bucket” of investments so that if any one individual investment goes horribly wrong then the overall negative impact on the group of investments as a whole is minimized.
Many things go into creating a diversified portfolio but the one thing that you have likely heard mentioned is the correlation of each of the individual investments within the group of investments. For the sake of this discussion all that you really need to have a firm grasp on is that correlation measures the relationship between the different investments – more specifically the degree to which certain investments can be expected to perform in a similar fashion or not.
All of that to say that diversifying income streams (like investments) should be done in a way so that correlation between the different income streams is taken into account (i.e. If something happened to very negatively affect my Income Stream #1 would it also affect my Income Stream #2 in a negative fashion?)
Let’s take a look at some practical examples both from some of my personal experiences and then most importantly from the owner of this blog. Granted, I do not know Mrs. Micah personally but as you can tell by reading her about page – Mrs Micah is well on her way to having this multiple income streams concept down to a science.
This blog is one of the best places I could publish a post on this topic because if you will notice in the about page that Mrs Micah at the age of 24 already has 4 sources of income (that I can count) that include working as a library paraprofessional, writer, blog consultant, and quilter/crafter (not including source #5 which is marrying someone with a job! Incidentally, a very real strategy for some but we won’t go there 🙂 )
The very first business that I started years ago was an independent agency selling Florida health insurance. I loved running the agency (and still do along with the much needed expertise of my business partner and head sales manager Mark – yes, I am the financial/computer nerd of the operation and he is the expert sales leader of the operation if you haven’t guessed 🙂 ) but as with any business undertaking it is smart to think of not just the present but the future and to try to capitalize on different trends in the market as well as prepare for any potential risks.
One risk to any health insurance provider or agency is the risk that future government intervention will negatively affect the individual health insurance business model. What this meant for me is that even though I had one income stream that was developed nicely (the health insurance agency) there was still work to be done in preparing for any potential decrease in that income stream. The first step that I took to make a second income stream for the agency that was not subject to the same governmental risk as the first income stream was to have all agents able to make money selling Florida life insurance.
This second income stream provides a way for any agent in the agency to continue to make a substantial income working to help clients with their insurance needs even in a “government takeover” of health insurance worst case scenario. This second income stream could best be characterized as an intra-company alternative income stream but as the title of this post implies I also took additional steps to form other companies that produce additional income streams.
Starting Multiple Businesses
Certainly one could start just one company and implement many of the “intra-company” alternative income streams and adequately hedge against most risks while starting a wildly successful company but if you are like me (and many entrepreneurs are since according to the Kaufman Foundation the average entrepreneur starts more than one company) then you likely love the thrill of starting new projects and new business ventures. While many serial entrepreneurs start multiple companies because they love entrepreneurship (as do I) it should also be thought of as a smart business strategy.
Here are some questions to ask yourself:
- What is your primary source of income?
- How dependable is that source of income?
- What risks are there that the income will disappear or be substantially reduced in the future?
- What can you do to minimize those risks?
- What is your fall back source of income if your primary source of income dries up?
- Are your alternate sources of income subject to the same risks as your primary source of income?
- What additional sources of income can you develop now that will act as a hedge against losing your current sources of income?
If you find yourself starting to feel a little overwhelmed and thinking to yourself “What is he thinking?? I have enough things to do with my current company without trying to start another company!” just keep in mind that one of the beauties of the Internet is that small businesses can be formed, websites can be built, and new streams of income can be developed in months and even days rather than years.
Certainly hard work and discipline will be required but I would challenge you to figure out where your area of expertise and/or passion is and see how you can put that to work providing you with an additional income stream. If you love crochet then build a website about crochet where you can publish new crochet designs and interact with other crochet fans. If you work as a Human Resources Manager then build a website that is packed full of great tips and inside knowledge from the HR field.
For me, I love anything related to the web, entrepreneurship, and finance. I am a CFP® and a self professed Internet nerd so it was only natural that I would take my love for those things and create a website for comparing credit cards, a website with tools for finding domain names, and a new site I just started working on – a site for comparing car insurance online – with the ease of setting up a mini online business the Internet can be a great avenue to begin to add some alternative income streams to your “portfolio” of earning potential.
My challenge to you is to ask yourself the above questions and then see what you can do to gauge the risks associated with your primary income stream, think of ways to minimize that risk, and then think of additional sources of income that are negatively correlated with your primary source of income and then find yourself in the enviable position of not having to be ultra dependent upon just one source of income. What do you think? What are your tips for developing multiple sources of income?