Not too long ago, the only method I had for earning money was my job. I’d get up, go into work, come home, and collect my paycheck – and I believed that was good enough for me.
When I had children, though, I began to realize that my life was not all that different than an investment portfolio where I had all my money in one particular stock. All of my income was reliant upon one job, and if that job went away, my family and I would be hurting.
But how could I solve this problem carrying a big debt load, a full time job, and the needs of a family? I realized what I needed to do was create more sources of revenue, even if they weren’t as much as my full time job, so that if something happened there it would not be nearly as disastrous. Here’s what I did.
I started a computer consulting side business. Nothing complicated, mostly just helping computer-phobic people select systems that match their needs, doing some tune-ups, and a few minor repair jobs. It doesn’t take much time at all and earns a bit of regular money.
I started a blog. You’re reading it, actually. I earn some income from the advertisements and the writing can be done pretty much whenever, filling in gaps in my time.
I built up a big emergency fund. I used the money from these sources to build up a large emergency fund. While the income stream here is rather small (5% interest on several months’ salary), the fact that the income is based on my own capital that I could use very quickly if needed makes it very nice.
Later, after I eliminate some debt, I hope to look at investments that will earn a better income for me, but for now these will suffice.
Obviously, these sources all require work, with the exception of the emergency fund. These are usually called active income streams. The emergency fund, which requires no active work, is a passive income stream. Obviously, passive income streams are better over the long haul because they provide income without additional work contribution. Active income streams generally involve a trade of work for money, which means that your time is consumed. However, passive income streams almost always require some significant money to start with, something many people don’t have.
What’s the real benefit here? Why put out a lot of effort for multiple active streams? The reason is the same one you’ll find for why you should have a diversified investment portfolio – if one of those streams dries up (I lose my job, the blog starts to dry up, people stop calling for consulting), I’m still doing all right because the other ones keep going. And when they’re all going, I make significantly more than I spend, so I can pay off debts and eventually build up more sources of passive income.
It all comes back to spending less than you earn; multiple active income streams just ensure that the earnings are pretty stable and that there’s a big gap between earnings and spending. Then, when you’re debt free, you can start taking those earnings and look for ways to build up passive income through investments.
How do I get started? The first step for the average American is to make a serious commitment to spend less than you earn. Without that commitment, none of this will work. Focus on paying down debts with the difference between your earning and your spending after you build up a small emergency fund.
The next step is to figure out something you’re good at. Perhaps you have a knack for making your grass look amazing, or maybe you know how to frame pictures so that they make exquisite wall hangings. Maybe you can write solidly very quickly. Almost any strong trait you have leads directly to some sort of profit-making venture that you can do in your spare time. Spend some time figuring out your talent, then think about how that could make money.
Once you’ve got something figured out, commit some regular time to it. Give up an hour of television each day to bake bread or matte finish photographs, then find places to sell them. Once you get the kinks of whatever your little business is worked out, it’ll become a steady small source of income for you – another income stream.
Then, use that income stream for something financially positive. Don’t spend it immediately. Instead, contribute that money to debt repayment or use it to invest in something – stocks or otherwise.
The real goal here is financial independence. By making yourself less dependent on a specific revenue stream (i.e., your primary job), you’re giving yourself independence and the flexibility to make choices that you never had before.