We’ve all seen the clickbait headlines on Linkedin and Facebook. Inevitably there is a book or video course at the end of it showing you exactly how to supercharge your own earning power to 7 figures and retire to a beach house on Bali.
Cocktails. Lamborghinis. Private jets. Damn it sounds good.
But what are these mystical seven streams of income and how achievable is it, in reality, to get involved in all of them?
Let’s ignore the snake oil salesmen part of it and see how we can actually turn it around to work for normal working joes like ourselves.
OK Guitar George, that’s good for you. Let’s survey the wider landscape and those in most need of diversifying their income streams.
The number of zero-hour employment contracts in the UK hit a new high of 1.8m at the end of 2017. That means 1.8 MILLION contracts where the worker wasn’t guaranteed a minimum number of hours of work in the week. Scandals uncovered at major employers such as Sports Direct and Amazon put the skids on the zero-hour Victorian-style workhouse mentality but that’s still a large slice of the UK workforce not knowing if they will have any income from one week to the next.
Numbers recorded as employed through employment agencies or self-employed seem to have bottomed out after a major spike following the 2008 Financial Crash. But here is another sizeable portion of the working age population who are in a precarious income position. As the looming threat of Brexit draws ever closer, there should be serious justification for concerns about their future earning power.
Spare a further thought for the much maligned millennial. House prices in major urban centres like London, New York and San Francisco are completely unattainable. Wage stagnation and educational inflation mean their student loans aren’t getting paid off any time soon. Even more alarming, the price of avocados is through the roof (jokes, jokes). Add in the rise of the gig economy, the growth of the ‘slasher’ career (e.g. data analyst/web developer/freelance writer) and the belief that retirement age will be well over the age of life expectancy by the time they get there.
It’s little wonder that mental health issues are on the increase. Stress, burnout and the resultant health issues are very real concerns for growing numbers of people of working age. You can’t ignore the possibility that you might fall victim to them over time.
Even for those who feel more comfortable in their full time employment status and guaranteed hours contracts, it pays to be cautious. Regardless of your industry, there really is no such thing as a job for life anymore. Market re-alignments, corporate mergers and redundancy can come out of nowhere and kick anyone’s ass.
Income diversification then is a means to lessen the risk of betting your whole future on one single source of income. We know from the Federal Reserve’s Survey of Consumer Finances that 50% of adults under 35 in America have less than $1,500 in savings. There isn’t a safety net there if the income suddenly dries up.
So before the Doomsday Scenario does happen, what the hell are we to do?
Wait a second. Isn’t this all just for the middle classes on six figure salaries? How am I supposed to get diversified on minimum wage?
Set aside the millionaire BS from the clickbait headlines we saw at the start. These are all income streams that are available to the vast majority of people. That doesn’t mean it’s easy to get them started or find the money to invest in some when you are trying to put enough food on the table. Weighing up the ‘right now’ against the ‘maybe down the line’ is a never ending struggle. People think I’m on commission for mentioning Maslow’s Hierarchy of Needs in every article but it’s fundamental to a lot of the personal finance issues I look at.
Bottom line is that you don’t have to get involved in all seven streams at once (or at all). But it’s good to know what they are and to plan around them accordingly based on your own circumstances.
This is going to be the number one income generator for the majority of people reading this. For the aspirational it’s also the main one we all want to be able to give up as soon as we can! Earned income means the money you get paid for doing your job. Salary, wages, commission. All earned income. You have exchanged your time spent doing something, be it cooking burgers or filing legal documents, and someone pays you money for doing that.
If you have a spouse or partner you can double down on this income stream by adding their income into your total as well. That diversifies within this one stream which is to be encouraged. It’s a little more risky if you both work for the same firm or even in the same industry (ask some investment bankers from back in 2008). But overall, it’s to be encouraged where possible.
Earned income will likely take care of your immediate outgoings (rent/mortgage, groceries, utilities, transport, entertainment etc.) If you are lucky enough to earn enough that you have some left over then it pays to plan for your future rather than treat it all as disposable income for the spending. Best selling author Ramit Sethi of [I Will Teach You To Be Rich(https://www.iwillteachyoutoberich.com)] is a major proponent of the ‘earn more’ school of thought rather than telling people to cut out the Starbucks latte every day. I agree but only once the savings and pension planning portion has been taken care of each month.
All sounds great.
The two biggest downfalls to getting too used to earned income are:
- Allowing your lifestyle to inflate each time you get a payrise.
- You get too comfortable.
Always remember the old joke about job standing for Just Over Broke. Then think about how many people you know that live from paycheck to paycheck. Even those on extremely good salaries can fall into this trap when the bigger bucks start rolling in. The regularly changed new cars. The bigger house. More expensive holidays. It’s an easy trap to fall into but hard to break out of.
When I last moved from self-employment and contracting into a full-time position, I remember a friend warning me about it making me lazy. Not lazy on the job in terms of work output but lazy as in getting too used to the regular income. He was right. I stopped side hustling. I stopped any freelance writing. And it took me several years before I started working those muscles again and trying to warm up that cold engine inside me.
The biggest risk of all with depending on Earned Income is that it will usually make up a massive percentage of your monthly income. If that goes then you are scrambling for alternatives or battening down the hatches of a sudden lifestyle downsizing. That’s why getting involved in several of the rest of the streams is so vitally important to all of us.
Put together a product or service that you can market and sell to other people for more than it costs you to make it and BOOM - you’ve moved yourself into income stream #2. Whether you are the founder of Facebook or the proprietor of a small local fruit n’ veg shop, it’s the race for Profit Income that’s driving you on.
Everyone assumes pulling profit from your business means you’ve moved into passive income territory but I find that’s rarely the case. I have a great level of mistrust for the whole passive income concept at the best of times as it paints a very misleading picture of what it really means.
For most business owners I know, running their business is anything but passive. It takes longer hours, more upfront investment in terms of time and money and runs the eternal risk of not only not paying out Profit at the end of it - you can also lose all you put in to start and run it.
Chasing the entrepreneur dream is not for the faint-hearted regardless of how many wantrepreneur blog posts you read. It’s tough. Tougher than working your 9-5. You’ve swapped out one boss for a dozen. Maybe more. And who needs that stress in their life? Especially if it all goes down the tubes eventually.
But there are upsides that mean you don’t have to go ‘all in’ and ditch the Earned Income stream to pursue your Profit Income dream. Try a side hustle. Get a few customers and limit it to a few hours in the evenings or on weekends. The extra income comes in handy and it’s a good hedge against the risk of losing your full-time job altogether. At least you’d have something to fall back on to get earning again as quickly as possible if you do lose your job.
And who knows where that might lead.
This one is a slow burner and an introduction to the key to long term success can be summed up in two words - compound interest.
Interest rates on most high street savings accounts have been in the toilet for a decade but there are options out there to make the most of the Interest Income stream. I am NOT a financial advisor and the vehicles available differ greatly from country to country so it’s best to get some independent financial advice from a reputable advisor.
Options can include instant access savings accounts, tax-free Individual Savings Accounts (ISAs in the UK), Treasury bills or government bonds or peer-to-peer lending services.
As I said, it’s the long term game but even at low rates of interest, it will start to compound up if you keep dripping little and often sums into each of the interest-generating areas.
Investing in stocks and shares crosses several boundaries between the different income streams but, again, needs to be approached under proper advisement. Buying into funds which track the performance of the market overall seems to be the preferred method of long term players. It removes the day to day management and transactions fees that so quickly eat into any profit you make from rises in the share price which certainly helps.
You can get regular Dividend Income from some of your stock holdings if the company pays a dividend after year end results. It’s proper passive income at it’s finest (there’s that phrase again) but it does come with associated risks as well. You take all of the rewards if the market goes up but you get hit badly if the market falls. You have to weigh up how much of your portfolio you want to risk on that possibility happening.
Everyone should be familiar with this one given the role it played in the great house price boom of the mid-2000s and the havoc it continues to play in housing markets around the world. Renting out a house, apartment or commercial building to tenants in exchange for money in the form of rent. A seemingly simple transaction and (once the property is paid for) supposedly free money each month.
My wife and I had a second property which we rented out. The rent covered the mortgage payments and local authority rates plus a little extra to cover minor property fixes and landlord’s insurance costs. We had some issues with leaking pipes and oil central heating boilers as most homeowners do from time to time. If there had been a major issues though, there wasn’t enough fat in the rent after expenses to cover it.
We also had to factor in the possibility of the house sitting empty if the tenants moved out. Even a single month could be enough to wipe out any profit for a whole year or more.
It’s also important to remember that purchasing property requires a large upfront investment plus a long term approach to an illiquid asset that requires constant care and investment to maintain it’s value. You also either have to manage the property and tenant relationship yourself or pay an agent to do it for you. Which means more costs to account for, either in terms of time or money.
Ultimately we decided it was too much hassle for the minimal returns to make it worthwhile right now. Changes in tax for private landlords in the UK will make this even less appealing over the next few years.
I know a lot of people who maintain a roster of rental properties and have taken a long term view of the value to their overall portfolio. It’s certainly not passive income though (yes, I’m going to keep beating that phrase until it dies the death it deserves.)
Don’t get swayed by the lure of quick, easy money. It’s anything but that. In time, it can generate considerable regular income for you if managed correctly and treated as a long term investment. But it’s not for the get rich quick brigade, that’s for damn sure.
You’ll start to see considerable overlap between many of these income streams and rightly so. Getting involved in one area of investment can mean you tick off more than one box at a time on your quest to complete the full seven.
For example, if you are already tempted into pursuing Dividend Income by investing in stocks and shares, you also stand to benefit from Capital Gains Income. The Capital Gains you can earn come from the increase in share price of the stocks you invested in. They will be eligible to Capital Gains Tax (we all have to pay the piper at some point on this Income Generating Journey) but that’s only due when you sell the asset for a profit.
Maybe you buy a rental apartment for 100 grand then sell it a few years later for 140 - you’ve just made 40k of capital gains.
That can also be viewed as a downside with Capital Gains Income as you have to sell the shares (or property or other value appreciating asset) to get your money out. It’s all income though and we certainly won’t turn our noses up at that.
Harry Potter creator J.K. Rowling’s estimated net worth is around $1 billion. She wrote some books, got them published and when they sold she got paid a taste of each sale for her troubles. The fact that they sold in such massive volumes are what took her from unemployed single mother writing in a caf’ to billionaire status. And that’s largely due to her Royalties Income.
It’s not only authors and content creators who can take advantage of this income stream however. If you create a new business process and license it to other businesses, they will pay you royalties for the use of your process.
If you were the owner of McDonald’s (still Ronald isn’t it?) then all of the franchise owners across the world would kick up royalties to you every month for the use of the McDonald’s franchise.
The bulk of the work then for Royalties Income will lie in the creation and development of a piece of work, be it art, literature, a training course or industrial process, that you can then sell on multiple times.
I am a big fan of this aspect of Royalties Income in that you do the work once and can sell it over and over and over and over and…well, you get the idea.
Not all of us can be J.K. Rowling or Stephen King when it comes to creating multi-million selling collections of popular books and movies. But that doesn’t mean we can’t use our knowledge and skills to build something smaller that we can then sell on and enter the Royalties Income world for ourselves. Worth having a think about at the very least.
We’ve found that the seven potential streams of income open up into thousands, if not millions, of variations for us to diversify our income. Spreading the risk of total personal financial collapse has to be the number one goal. When you realise it comes with the added bonus of better preparing our financial futures as well, the value just keeps compounding.
Whether it’s building a lucrative business or side hustle in our spare time or investing our savings in index funds or the long term, there are few excuses for ignoring all of the options in the 7 income streams checklist.
Take a look at your own finances today. See what you have coming in and going out and where the non-essential outgoings might be better invested.
Twenty years down the line, Future You will thank Today You for doing it. It’s worth it, whether you ever hit that millionaire level or not.