Atomic bomb? Huh? The good times are back again and it’s champagne dreams and caviar wishes all around! Let’s over allocate into equities, not save for retirement (since that’s what our home equity is for), and enjoy life today, for tomorrow we might be gone.
It’s amazing how things have changed since 2008-2009. I hardly know anybody who has been laid off recently and I know plenty of people who’ve either got nice raises and promotions at their existing employer, or who have moved on to new employers for much bigger paychecks. Some employers are throwing obscene amounts of cash at under-qualified people because they’ve lost out on one too many bidding wars. And when you’ve got investments making more than your monthly paycheck, why even bother thinking about diversifying your income sources?
Trading time for money is essentially what most people do for a living. Hopefully the time spent is doing something worthwhile, like helping people lead better financial lives. But income is largely capped given our time is finite. If we’re not aggressively saving for retirement, then we’re hoping our investments will provide a huge windfall. And if neither happens, then we might just be working forever.
FIND AN IMPETUS
I first started getting serious about developing multiple income streams after the NASDAQ bubble burst in March, 2000. I was a second year equities analyst at Goldman Sachs who thought very ignorantly that everything would come bouncing back. Things did. It just took 14 years to do so!
My impetus for developing multiple income streams came out of fear of unemployment, loneliness, and poverty. No woman wants to be with a guy who’s broke and living in his mom’s basement. During the recession, I witnessed people lose everything due to margin investing. They borrowed 100% of their equity and when stocks went down 50%, their accounts went to $0. I remember buying WorldCom options with a $100 strike price in 2000 that ended up worthless. Ah, the days when so many of us couldn’t lose money fast enough.
My current motivation for developing more income streams is the fear of losing freedom. I don’t ever want to be forced to stay in a situation where I have to do something that I don’t want to do. Nobody does, and that desire for freedom only goes up the older you get.
Common reasons to develop diverse income streams:
* Spend more time with family
* Protect against unemployment
* Ensure professional autonomy and freedom
* Support a family
* Keep things fun and interesting
* Take a stand during periods of injustice
* Give back to the community
* Tell your boss to take a hike
* Pursue your dreams
* Because someone said you’ll always amount to nothing and you want to prove them wrong
VARIOUS TYPES OF INCOME STREAMS
A salary is the most common income stream. Let’s discuss other common income streams available to most people.
* Dividend income. There are blue-chip companies like Coca-Cola and McDonald’s who provide a consistent dividend payment thanks to their defensible, cash cow businesses. Dividend income is taxed at 15% and is one of the most passive income streams around. If you can earn a dividend yield that is higher than the 10-year US Treasury yield, I’d consider doing more due diligence on that particular security.
* CD interest income. CDs act like non-tradable bonds that provide a guaranteed fixed interest payment for the duration of the instrument. The great thing about a CD is that it’s FDIC insured up to $250,000 per individual, and $500,000 per married couple. You can reinvest the interest back into the CD, or you can direct the interest to be paid to another account. The bad thing about a CD is that interest rates are so low. It’s hard to find any 5-year CD that is yielding more than 2.5%, for example. Back in 2009-2010, however, it was common to find 5-year CDs yielding over 4.1%.
* Bond interest income. Bonds come in all sorts of shapes and sizes. You can invest in US Treasury bonds, municipal bonds, corporate bonds, junk bonds, convertible bonds, zero coupon bonds, emerging bonds, and more. The principal idea is the same for all. There’s a coupon payment and a principal that is promised to be returned if a bond is held to maturity if nothing disastrous happens. During the time between issuance and maturity, a bond’s principal value can fluctuate up or down depending on variables that affect most investments: interest rates, a company’s operational performance, government regulation, and more. The big fear with bonds is that they have downside risk given interest rates are at historical lows.
* Venture debt income. Are you interested in investing in fast growing startups, but don’t want the often all-or-none type of risk that equity offers? Venture debt is a way to earn potentially 8-15% annual rates of return by lending money to startups for a 1-3 year duration. A startup may want to borrow from a venture debt fund because they don’t want to sell more equity, especially if the equity value is growing at much greater than 8-15% a year. A startup might want to just have operational cash for a rainy day until its next round of funding.
* Peer-to-Peer lending income. P2P lending is when you lend to other individuals. Prosper and Lending Club are the two largest P2P lending platforms. They advertise lenders can make roughly an 8% annual rate of return with a well diversified portfolio of 100 loans. There’s no return guarantee as it depends on how well you choose your borrowers. However, a comparison should be made against other interest bearing and lending opportunities.
* Rental property income. There’s probably nothing easier to understand than owning a rental property. The hope is to generate a rental income far greater than operational cost. Because a rental property can also provide shelter and increase in principal value with no set maturity date, rental property is one of the favored asset classes to building wealth. Rent prices tend to be sticky during a downturn, and adjustable during an upturn if you aren’t under rent control. The key is to run multiple profit and loss scenarios and hold for the long term.
* Hobby income. Everybody has a hobby and is good at something. There’s a good chance you’ll be able to make some extra income teaching other people what you know. For example, I’m an OK tennis player so I occassionally give tennis lessons. Some of you might be good at a musical instrument, singing, dancing, cooking, or another language. Why not market your services online, teach for a couple hours a week, and make extra money? Who knows, your hobby income might grow so big that you might be able to quit your job one day.
* Freelance income. Perhaps you can turn your hobby income into a more professional, freelance income type of opportunity. I’m currently freelancing for Personal Capital to help expedite a rental mortgage payoff in order to generate more passive income for when I’m too senile to work. Perhaps you were a patent lawyer for 15 years and no longer want to do the full-time grind. If you have valuable professional skills, there are plenty of freelance opportunities that might even pay better on an hourly basis than a full-time job. Some common freelance opportunities include: writing, graphic design, consulting, and legal. Too bad receiving health care benefits is usually not in the cards.
* Business income. If your hobby or freelance income gets significant enough, you might as well start an LLC or S-Corp to protect yourself from liability and manage your taxes better. Reducing taxes is similar to increasing income. It’s easy to start a business nowadays thanks to the Internet. Create a product, rank for some key words related to the product, and sell the product on the Internet. The process is not harder than it sounds. You’ve just got to give it a go.
THE KEY IS TO START NOW
It takes a lot of time to develop a significant amount of income streams that can support you in case of a job loss. When times are good – as they are now – it’s easy to forget about the bad times. But bad times will inevitably occur. The key is to start now and slowly build your financial engine.
Shoot to make your first $100 a month in alternative income. Then aim for $500; $1,000; $3,000; $5,000; $10,000 and so forth. The more effort you take now to develop your income streams, the larger they will grow in the future. Give yourself a chance to get lucky. The worst is waking up one day and realizing you no longer want to go to work, but realizing you must because you’ve got no other alternatives.
I keep track of my net worth and various passive income streams through Personal Capital’s free financial dashboard. If I didn’t, I’d probably implode.
Readers, what are some alternative income streams you’re developing for a better financial life?
Photo credit: Bomb by Gavroche, Flickr Creative Commons
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