When I lost my job last year, my former employer didn’t have the means to pay me a severance. Not even close. Our family had emergency savings, but it was our multiple income streams that kept us afloat.
Five years earlier, a job loss would have been much worse. But since I saved and invested while times were good, I could enjoy my period of unemployment and focus on building my side business.
Having secondary income streams also gave me the flexibility to wait for the ideal job instead of jumping at the first gig I could find.
I always knew multiple income streams was a key to financial security, but this was the first time I had to rely on investment and business income. I’m currently earning from seven sources of income plus my full-time job, and I’m considering adding one more before the end of the year.
This article is about different types of income streams, how many you should have, the benefits of several income streams versus just one or two, and how to create them.
Types of Income Streams
One way to look at multiple income streams is to compare between active and passive.
Active income is earned by trading your time for money. This can be a salaried full-time job, hourly work, business income, gig jobs, commissioned income (i.e. sales), or side hustle income.
Passive income, on the other hand, is earned by investing an upfront amount of time and/or money into investments or business ideas that pay you when you’re not actively working.
Dividend stocks are a common passive income source that I share here on the blog. Once you put in the research to choose a dividend stock, that stock pays you quarterly for as long as the company is thriving.
The right companies pay increasing dividends over several decades.
Other examples of passive income include certain real estate properties, real estate crowdfunding, royalties, certain online business income, or something as simple as interest income from a high-yield savings account.
The key to building wealth is to use excess cash flow from active income to build passive income streams.
Read more: 20 Passive Income Ideas
Here’s a quick look at some examples of active and passive income.
Active Income Examples
Most readers of this site probably have a full-time job that hopefully pays a healthy salary and benefits. There’s a certain tranquility that comes with a steady salary.
Salaried jobs usually don’t make us rich, but they provide a stable baseline income to buy a home, support a family, and live a happy life.
But not all hourly work is created equal. Certain consulting jobs are paid on an hourly basis with no benefits. This can be an excellent way to earn and save using tax-advantaged accounts.
Business owners earn income differently than most workers. While many business owners pay themselves a salary, they also pay themselves profits. That’s a good way to get rich.
Gig Economy Income
Think Uber, Lyft, Fiverr, Task Rabbit, Upwork etc. These are jobs in the modern economy based on supply and demand. If there’s a market need, someone will be there to fill it if they pay is good enough.
Commissioned sales jobs are ideal for go-getters, people who are willing to work hard to earn more. A good friend of mine was a copier salesman for many years. It was tough work, but the harder he worked, the more he earned.
Some sales jobs have a base salary or hourly wage (i.e. wait staff). Others are completely based on performance. Multi-level marketing (MLM) jobs only pay out if you make sales. Anyone on Facebook is more than familiar with MLM.
Side Hustle Income
A side hustle is a business outside of your day job. The point of a side hustle is to earn smart, not hourly. Some side hustles become full-time businesses, while others (like my blogging business), are perfectly fine remaining side hustles.
Passive Income Examples
Before starting on types of passive income streams, it should be noted that no income stream is 100% passive. All passive income streams need to be monitored. They have different levels of passivity.
For example, a savings account that pays interest needs very little monitoring, while dividend stocks require a bit more attention.
Below is a list of examples of passive income.
I’ve invested in high-quality stocks that consistently pay and increase their dividends even since my uncle gifted me one share of Chevron in 1995.
Every year since, Chevron has increased the dividend, paying me more and more. I’ve done nothing to earn those increases. All I do is read the financial news to make sure the company can continue to thrive and pay the dividend.
Dividends are one of my favorite income streams for this reason. When stocks go up and down, dividends remain consistent. Income from dividends is far more predictable than market fluctuations.
Real Estate Properties
Rental properties are a great way to build wealth and typically offer a greater return on your money than dividends. Real estate properties can be passive, especially if you hire a management company.
I have one rental property that I’ve been renting since 2011. Month-to-month, it takes less than one hour of my time to manage. Occasionally, it takes several hours. But for the most part, I consider it a passive income stream.
Rental properties are not for everyone. So consider your willingness to deal with occasional headaches before you jump in. Or hire a manager.
Real Estate Crowdfunding
For those looking for a more passive income stream than rentals, consider real estate crowdfunding. With crowdfunding, you can invest small dollar amounts in high-quality real estate properties. You own a piece of several properties instead of one.
Investing this way spreads the risk among the crowd. It allows you to own great assets with good returns, yet keeps your hands clean of all the hard work.
Crowdfunding is also good for diversifying away from stocks, which is especially important when stocks are volatile.
Nearly an entire generation hasn’t experienced the joy of receiving 2%-4% interest from a bank for simply saving your money with them.
Well, rates are finally on the rise again after of decade of minuscule interest rates. You can now receive 2% or more in interest from high-yield savings accounts and money markets.
I’m in the process of building up my cash reserves to better prepare for emergencies and create an opportunity fund. The higher interest rate makes the stash of cash more palatable.
Musicians, artists, acting professionals, and writers can earn recurring passive income from royalties. Royalties are payments made to creators for work they’ve done in the past.
It’s another example of work done once that continues paying once it complete. Talent, luck, and level of success are significant factors in determining how much money can be earned from royalties.
I’ve been a long-time investor on the LendingClub platform. It’s another potential income source for individual investors. Though I’ve stopped investing new money on the platform, the investments I’ve made over the past five years are still paying me every month.
Read my Lending Club Review here.
How Many Multiple Income Streams Should you Have?
This number depends on the individual. “As many as possible” is not the answer. It’s unwise to spread yourself too thin.
Salaried career income requires at least one skill set. Some demanding careers such as legal, medical, and consulting may be too time-consuming to work multiple jobs or start a side business.
But everyone should start investing, even those living paycheck to paycheck.
Choose the income streams that are right for your career, skill set, risk appetite, and willingness to learn. More income streams require more tracking, monitoring, and knowledge.
Before diversifying too early, make sure you’ve built a sufficient income from one source before moving onto the next.
Setting up systems for tracking dividend income and other streams can streamline the amount of work it takes to monitor your income streams. You also must become knowledgeable in the various assets.
For example, if you’re considering becoming a real estate investor, you should read a book that tells you how it’s done before getting started. That requires a time commitment which is especially important when learning something new.
Though several multiple income streams are not required to build wealth, I’d say that most wealthy people have at least five separate income streams, often many more than that.
I don’t have a specific goal for myself, but I as I approach ten different income sources, I’m comfortable around this level. More than ten may complicate my financial life too much.
Benefits of Multiple Income Streams
Building multiple income streams has several advantages over relying upon one income source.
This seems like a no-brainer to me. What’s holding other people back?
I believe it’s a lack of confidence and knowledge and the fear of making a mistake. But I argue that the bigger mistake you’ll make is to remain idle and not make the financial and time investments required to build multiple income streams.
Focus on building income streams when times are good. You’ll thank yourself during the next recession.
Security is the big one. I experienced this first-hand as I mentioned at the beginning. My secondary income streams did not cover all my expenses and certainly didn’t make up for my lost salary. But having that passive income hit my accounts made my family more secure by helping us pay the bills.
Also having a business vehicle in place to help me earn while I wasn’t on a company payroll was a big help too. My online business kept me busy and kept the income flowing.
Secondary income is empowering. It gives you more leverage in your career because you don’t need your stinkin’ job. You work because you want to, not because you have to.
This was especially helpful during my period of unemployment. I didn’t want to search for a job out of desperation. I wanted the ideal job, which I knew was out there since the economy was strong.
As I said earlier, the key to building wealth is to use your active income to create passive income. Even if you’re starting with a few dollars a month, take your money and start building your brick wall. There are no shortcuts. But over time, your wealth will grow and compound.
Compound interest is a fascination of mine since elementary school. When I first understood the concept as a kid, my mind was blown.
But for years, I relied only on compounding investments. What I’ve learned since starting my side business, is that increasing income outside of investments is a turbo-charge to wealth creation.
Knowing this now, I’m disappointed in myself for not starting a business earlier. Had I made a secondary income when I was single and had way more time, who knows where my forward 12-month investment income (F12MII) would be.
How to Create Multiple Income Streams
The key to creating multiple income streams is persistence. This is not a get rich quick scheme.
But getting started is paramount. Start your first investment immediately, even if you’re a novice. At a minimum, open an interest-bearing savings account or invest $100 in a stock ETF (I recommend the Vanguard Total Stock Market Index ETF for beginners).
When you think of each dollar you earn as a potential building block, you’ll want to hold onto more of them. Implement the Triforce of Wealth – earn more, spend less, invest the surplus.
Use your primary income source as the main driver while you slowly build supplemental income. Exceed expectations at your day job. Relish raises, but don’t spend them.
Consider starting a side hustle to earn more. Earned income grows faster than investment income and has greater potential in the short-term. Investment income has the greater potential over the long-term.
Focus on one income stream at a time. Once you’ve built up extra income through a passive or secondary active stream, consider diversifying into other income producing investments.
Keep building. Reinvest proceeds into more income producing assets. Rinse and repeat.
Are you building multiple income streams? How many income streams are you earning today? What’s your target?
Photo credit: uniquedesign52 via Pixabay
Subscribe to Retire Before Dad!
You'll receive my weekly articles in your inbox and the FREE eBook 6 EASY Income Streams You Can Start Building Today!