Around my eighth birthday, my Mom took me to a bank to set up a passbook savings account for me. I used it to deposit birthday money I received from my Aunts.
If you’ve never seen one, it’s sort of a ledger of your bank account printed in a book the size of a passport. You deposit money, withdraw, or receive interest and the teller has a line printed in the book. I thought this was really cool as a kid.
The day I opened that account I started receiving my first passive income, interest on cash in the bank.
Building Multiple Streams of Income
Recently I’ve received some comments about my multiple streams of income. I think diversifying into multiple steams of income is a good strategy for me for the long-term. As a trend, diversifying income will grow as people change the way they define retirement. Here’s a more detailed look at my various income streams over the years.
My various day jobs over the years have always earned me the largest percentage of my overall income, dating back to my newspaper route at age 13. The job didn’t pay that well, but I learned that collecting money from people that don’t have any can be difficult.
Later I mowed lawns, worked in retail, life-guarded, and worked in a photo lab to pay for things as a teenager. Today I’m an IT consultant. Translated into something my parents understand, I say I work with very large computers. A day job can be a great way to earn a lot of money, but there are two major costs associated with it. Time and taxes. Taxes are inevitable, but it’s our time that is most valuable. Day jobs are certainly not considered passive income.
Interest on cash was my only passive income source until 1995. That year, my uncle gifted me one share of Chevron (read about it here). I still own that share, and and many more now. They’ve paid me dividends ever since. The share I was given for my birthday is what really introduced me to investing for the long run. Dividend income is one of the most accessible forms of passive income out there, especially since brokerages are online now and sometimes don’t even charge fees.
At one point I was a short on cash after college and liquidated a small number of my Chevron shares. The price was up more than 50% since I had started buying. The sale was the beginning of yet another source of income, capital gains.
Over the years I’ve sold some stock here and there, sometimes for gains, sometimes because I made a bad investment decision and sold for tax loss purposes. But since the financial crisis of 2007-2009, I’ve decided to go back to my roots of investing for income to build a nest egg that will allow me to retire by age 55, one year before my Dad retired.
Selling stock to realize capital gains is always a way to generate more income if cash is needed, though less sustainable than dividends. I generally choose to hold stocks for the long-term instead, collecting the dividend. Option trading is another vehicle to produce capital gains.
Birthday money dried up many years ago. As I became wealthier and more educated about money, interest on cash, day job income, dividends and capital gains were not enough income streams for me. I wanted to diversify my income streams even more to help reach my retirement goal.
Back in 1996 I met a 27-year-old who owned a beach rental property. I still remember it was a four-unit complex. He paid $160,000 for it. He put every penny he had into buying that place, and likely some debt into maintenance costs. I used to build cash flow models based on his numbers to try to guess how much money he was making. It was tricky math because he could charge high rent, but only for 3-4 months out of the year being in a beach town renting to beach workers instead of beach-goers. He was probably close to break-even that first year, but every year since I’m sure he made more and more. If he still owns it today, that four-unit beach apartment complex has surely appreciated handsomely.
Meeting this guy while I was in college studying finance was another eye-opener for me as I realized it was possible to become a landlord at a relatively young age. As with most investments, the earlier you start the better.
But I didn’t become a landlord in my 20’s because my priorities led me to travel the world for 14 months, spending nearly every dollar I had in the bank on globetrotting. To this day, it was some of the best money I have ever spent. It was a stellar investment in life experience, but afterwards I was nearly broke.
Four years after I returned from traveling, I bought my first property, a one bedroom that I lived in for nearly five years. When I moved out with my wife into the home we live in now, the condo became a rental, fulfilling my aspirations of becoming a landlord. However, it wasn’t a source of income at first. It produced a loss due to that little financial crisis I mentioned earlier.
But things have their way of working themselves out. That crisis led to the very low interest rates we see today, and I was able to refinance that condo to make a small profit. Now I’m even considering selling my condo.
Real estate income as another source makes five. But five was not enough for me.
In early May of 2013, Google announced they invested in a company called Lending Club. I had heard of peer lending, but didn’t pay much attention. Google’s stake was another learning moment for me as I discovered yet another source of investment income, this time even more passive than others. I update this blog every once in a while with my Lending Club reviews. Click that link to see my investment performance results.
Six sources of income is pretty good, but I’d like to find some more. Tracking all of this can be time consuming, but I enjoy it. There’s also plenty of places I can automate and save time.
More Potential Streams of Income
I’m always thinking about building more income streams. A new source could include moonlighting at a second job, but I’m at the point in my career where I’d rather spend time at home with my kids. The point is to ultimately work less hours for someone else, not more. So what are some other possible streams of income?
I recently came across an article that gives suggestions for many more streams of income. In fact, 29 ideas for side hustles and extra income. #26 was particularly funny – “Cuddle for Cash”. Not my cup of tea, but I like the creativity. Check it out over at The Penny Hoarder.
For our family, selling crap in our house is one idea. I’ve sold a few baby items this year, so I guess that could be considered an income source. But the inventory is limited. Reselling goods on Amazon or eBay would be more sustainable. Buying a product in bulk that is in demand, then selling at a profit is an age-old business. Storing and shipping the product can be complicated variables that need to be accounted for. Time is a big factor too, unless you are able to hire everything out. If it was simple, everyone would be doing it. While viable, I don’t think this is for me because of the time commitment.
What about buying a business or franchise? I’ve definitely looked into a few. Instead of buying more real estate or stocks, why not invest in a low-cost-to-entry franchise? There’s hair cutting, ice cream, sandwiches, batteries, and any number of franchises out there. To be successful in franchising you need to be all in. To be all in, you need to be passionate about the product or service. I haven’t seen anything out there that I’m that passionate enough about that I’m willing to risk a large amount of capital on a new business. This might work for some seeking financial independence, but plenty fail and lose their shirt. It takes experience and lots of capital to be a successful franchisee.
I spend a lot of time on this blog. If I can make some money online, that would be cool. But I write for many reasons, not necessary for income. Blogging is an outlet for me as my day job isn’t professionally all that exciting. At times I have thought about a career in financial services, but chose a different path. Perhaps blogging could lead to some freelance work that I can do from home. Moonlighting from home would be much better than delivering pizzas or working in a UPS warehouse. One great benefit to blogging is you learn about how internet businesses work, so it can be a platform for other money making ventures.
Do One Thing or Diversify Income Streams?
Do one thing and do it better than anyone else – Orville C. Redenbacher
I’ve always liked that quote by the popcorn maker. One or two passive income streams may work for some people out there because they can really focus on the task at hand, at the thing they know best. For me in life and investing, I’ve always taken a be good at a lot of things approach, instead of focusing on one sport, talent, or investment strategy in this case.
The point of this exercise is to look at my income streams to see where I am and where I can be in the future. Multiple streams of income, whether passive or not, take up more time. At this stage in my life, I’m focused on building income and net worth so that when I’m older and ready to retire, I can wake up and do nothing if I wish. Today, I want to work hard to build as much income as I can. I plan to keep working until my kids are in college, right around my retirement goal age. College expenses are the greatest risk to my retirement goal. If I can quit my day job before then, that would be fine, but I’d still be active with other income. When the time comes, I want to travel in retirement and not work at all.
Diversifying with multiple streams of income helps to mitigate risks. Real estate and stocks tumble? Still have the day job. Lose the day job? Real estate income, dividends and P2P lending income continue on. Losing a day job could even lead to turning a side income project to a full-time day job.
Having only a day job for income makes an individual more reliant upon that income. Lose a day job and the only source of income is gone and the need for debt grows if savings isn’t sufficient. Consumer debt and long periods without any income can lead to big problems as we all know, and it most definitely slows down progress on long-term goals.
What is your take on diversifying with multiple streams of income? Is it important to you or not so much?
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