The Importance of Income Diversification

The current state and structure of the world economy, as well as its frequent uncertainty, makes the diversification of one’s income a critical component of good personal finance. However, if you are starting from scratch, diversifying your income streams can be very difficult. In this article, we will look at some of the many reasons that income diversification is important, as well as a few of the ways you can go about it.

So, why is it so important to have multiple sources of income? The simple answer is that any one source of revenue can fail at any time due to unforeseen circumstances. For example, it is likely that you have a regular job, which you rely on as your primary, and most likely only, source of income. Most people consider their jobs to be secure, but taking that concept for granted has led to adverse financial effects for many who have made this assumption. Companies can go bankrupt, individual outlets can be closed, layoffs can be employed to cut labor expenses, and individual jobs can be lost at almost any time. By diversifying your income, you can protect yourself from these kinds of events, as well as increase your total earning potential. Creating multiple streams of revenue can also open up new opportunities for you to learn and grow. You may even find yourself in a position to start your own business. The idea of diversification in finance is far from new. In fact, it has been a common strategy for the creation and retention of wealth for decades.

The beginning steps of income diversification are not easy. Investing your time and money wisely will call for a great deal of research into any venture before you decide to pursue it. Whatever you do, be sure to know precisely what you are getting into before you put any money into it. In the next few paragraphs, we will briefly explore three good methods for creating alternative streams of income. Keep in mind that these are only a few of the thousands of options available to you.

The first idea we will touch on is the age old concept of investing in financial assets. Stocks and bonds have proven themselves to be reliable and predictable money makers, when properly handled. A good portfolio of solid stocks can be an excellent way to create additional wealth. In particular, dividend paying stocks stand out as a good investment, as the dividends you receive may either be reinvested into more of the same stock or come back to you as additional cash revenue. Allowing dividend paying stocks to compound over time and increase your stock holdings is an excellent model for consistent growth. Also in the category of financial assets is the relatively modern idea of peer to peer lending. Several online platforms now allow individuals to borrow money from other individuals, allowing investors to realize the same kind of interest rates that banks and financial institutions usually make on a loan. In terms of sheer earning potential, these loans are among the best investment tools. They can very safely earn investors 7-8% return at very low risk. Higher risk loans can earn in excess of 15%, but come with a higher likelihood of the borrower defaulting.

Secondly, there is the more active approach of beginning a small business enterprise. Most people think of starting a business as something that requires full time work, and therefore something that cannot be done while in a traditional job. However, this is only the case with some business models. Others, such as starting a small contracting service, offering freelance services online, or starting a resale business, can be run very effectively on a part time basis. This is probably the best method for protecting yourself from the potential loss of your primary income source, because it gives you something to fall back on in that event. Starting a small business on the side also gives you the freedom to make revenue as you need it. For example, in the event that you needed extra money for an unexpected bill, you could simply do a bit more work than usual in your side business to make up the shortfall.

Lastly, we will explore the idea of real estate investment. This is certainly the method with the highest financial entry point, but it is also one of the best possible methods for generating long term revenue. There are two primary methods of real estate investment. The first method is that of purchasing, improving, and then selling a property at a profit. The second method is that of purchasing and then renting out a property, thus creating a permanent stream of income from that property. While each has its merits, the second method is generally best for long term success and revenue generation. The idea of reselling properties has massive profit potential, but can be extremely risky, as well as dependent on the state of the real estate market at any one time. Using rental properties for income is somewhat less risky, and the rental market tends to be fairly consistent.

As you can see, there are many methods for the diversification of personal income. The three we have explored here are far from being the only ones, but they are some of the most proven. Hopefully, you can now see how important it is to create multiple revenue streams in order to ensure your long term financial stability. If you are seriously interested in pursuing this, a good first step is to talk to a financial adviser about your plans.

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