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How Important is Income Diversification?

by MD on January 10, 2011

Income diversification. You know the idea of having more than one source of income. A popular topic and an idea that’s heavily promoted. The phrase is commonly mentioned on personal finance sites, but why is income diversification so important?

Unemployment.

With high unemployment rates, gone are the days where you work for a  company for your entire life and retire happily. At any point in time you could lose your job. Even worse you could also struggle to find a new job. With all of this mentioned, it’s clear that having a few income sources will definitely get you through the lean times in life.

Recession.

The recession and high unemployment obviously go hand in hand. Suze Orman says, “the financial crisis is the greatest thing that has ever happened to our generation.” Whether you believe this or not, it does make sense in a way. What the recession of late-2008 showed us is that anything can happen. Your once “steady job” can go out the window. Your “recession-proof” investments could go down in value. Instead of complaining about it with your friends or watching the evening news, you need to accept reality and learn how to move on. One of the best ways to move on is to diversify your income. When you lose one source of income, the purpose of diversification should be to sustain you while you try to get back on your feet.

Risk tolerance.

How well do you handle risk? Does the thought of losing your job keep you up at night? Is your emergency fund low? Is your overhead high? These are all questions that you need to consider as you start to focus on diversifying your income. If you really can’t handle risk then you need to focus on diversifying your income ASAP.

How can I diversify my income?

  • Get a part-time job.
  • Start a side business.
  • Invest in a rental property.
  • Freelance your skills.
  • Continually apply for new jobs.

Below is my income breakdown followed by some of my thoughts.

Income Breakdown

My Income Breakdown

These numbers are very rough as my income fluctuates on a monthly basis. As you can tell my current job is responsible for the vast majority of my current income. I’m not too thrilled about this. I would like to slowly decrease this figure until my current job is of course eliminated from my income breakdown. I would like to bring my online income to about 60% of my income because you really can’t trust online income too much. Also as I save more money over time I would like to invest more money. This would hopefully bring my income from investments up way past 10%. Finally, I plan on increasing my other income by selling more crap and finding unique ways to make a few extra bucks here and there.

How does passive income factor into this?

By creating passive income over time you’re able to alleviate some of the stress that comes with market fluctuations and an unexpected loss of work. Passive income allows you to diversify your income between your current job and any other sources of money that you have. You can also use your passive income to build up your savings/emergency fund to help you get through the lean times.

How diversified is your income at the moment?

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