Creating multiple streams of income ensures that you do not rely on just one. If one of the streams gets cut-off then you aren’t dead in the water. It can be difficult to build the streams big enough to support daily life (financial freedom) but it is a worthy pursuit.
Earned Income (W-2)
The primary source of income for most people is earned income or a job. We are taught early by our education system and our parents to go to school and get a good job. What they do not tell you is that earned income is the highest taxed.
It is difficult to build up multiple streams of income when the job you have doesn’t earn enough to cover the bills after taxes. This is where you need to become more frugal to build the streams or build skills to earn more income.
Increasing the primary flow of income will make it easier to start building on the other streams through investments and other businesses.
Side Hustle
Recently the middle class has been getting squeezed which has led to the rise of the side hustle. Side hustles can be working another job like driving for Uber or working a 2nd shift. Side hustles can also be an online business that you do after your regular hours. Side hustles are popular because if they are successful they can earn more money than your main job.
Some popular side hustles include:
- Driving for Uber or Lyft
- Delivering for PostMates or Uber Eats
- Renting out a room on Airbnb
- Blogging
- Walking Dogs
- Selling stuff on eBay or Amazon
- Tutoring
- Digital Marketing
With the internet being a legitimate place to do business, the ideas can be endless. These are just a few. If you google “side hustle” you can find hundreds of ideas to earn extra income.
Interest Income
This stream of income comes from sources such as a savings account or a certificate of deposit. You are lending your money to the bank when you put it into a savings account. The bank uses that money to lend out to other borrowers. In return they will pay you interest income for it. The current low-interest rate environment offers little to no interest income for savings accounts.
In recent years peer-to-peer lending sites have become popular. You can loan money to someone online and receive interest income while they pay you back. There are some risks involved with that method and it is best to fully research who you are lending to. The interest income will also be taxed based on your tax bracket.
Dividend Income
Dividends are a sum of money paid regularly by a company to its shareholders out of its profits. If you own stock in a company that pays dividends, then you will receive dividend income usually on a quarterly basis.
Dividend income is nice because it is passive. You do not need to manage the employees, produce the goods and services, and invest in plant and equipment or any of the hard work to receive the dividend. All you need to do is invest smartly in stocks that pay good dividends.
There are some stocks that have been paying dividends for decades and some still that increase their dividends each year. Coca-Cola (KO) is an example of a stock that has achieved Dividend King status.
In addition to getting dividend income from owning stock, you can also see in increase in value if the stock price rises. Note that dividend income is taxed.
Rental Income
Real estate is one of the more common ways that people become wealthy in America. Owning land that produces cash flow has a high barrier to entry, so initially it is harder to get into than buying dividend paying stocks. Most people start with a primary residence. There are lending programs like FHA and VA loans that allow for a smaller down payment than the conventional 20% down.
House-hacking and Airbnb are good ways to provide rental income if you are able to secure a personal residence. Also acquiring additional rental properties that are managed by property managers can provide great rental income if you buy right. Bigger Pockets has a lot of resources on getting started as well as financial calculators to help you analyze rental properties.
Rental income can also be passive if you invest in apartment syndications as a limited partner. Usually this requires a larger sum of money to invest, but as a limited partner you will not have to manage any of the issues at the property.
Capital Gains
If you sell your stocks or your house later after it has risen in price, you can receive capital gains. Capital gains are the amount of money you earn over your purchase price.
It is considered a stream of income because if you track your net worth (everyone should track it) you can also track the asset price. Then you see the asset price rise on paper and consider it as a stream.
There are different tax implications when it comes time to sell an asset.
If you sell assets that you bought within a year, then it is considered a short-term capital gain and it is taxed at your normal income tax rate. If the asset is held for more than a year, then it is a long-term capital gain and you will be taxed somewhere between 0% and 28% depending on income and filing status.
Real estate has a lot of tax benefits to offset capital gains and it is the reason why it is a popular wealth-building strategy. I recommend reading this article by Brandon Turner: The Ultimate Guide to Real Estate Taxes & Deductions
Royalties
Income earned from royalties can be difficult to obtain but can offer great cash flow. Royalties work by paying the owner of property for use of that property over a specific period of time. They usually deal with intellectual property.
Some examples of royalties are:
- Music
- Art
- Books
- Mineral rights
- Patents
- Franchises
Depending on the agreement some of these royalties can be paid for a lifetime and passed on to heirs.
Conclusion
Traditional thinking doesn’t lead to creating diversified income streams. I don’t remember a single time in school where the teacher talked about how important it is to have multiple streams of income. The COVID-19 situation should be reason enough to know why having multiple streams is important. It does not happen overnight but being conscious, continuously educating, and working towards something will yield far better results than leaving it up to chance.
