“Too much of a good thing can be wonderful!”
–Mae West
Is it possible to have too much of a good thing? According to two-thirds of millionaires, the answer is no. And the richer they are, the more they have. Most would argue that it is hard to get enough.
You might guess it is money. And it is–sort of.
It is multiple sources of income.
For instance, typical sources of income can include a second job or a gig. However, income can come from an investment, a rental property, pretty much anything that generates cash.
THE CLASSIC APPROACH: START MULTIPLE BUSINESSES FOR MULTIPLE SOURCES OF INCOME
Billionaire Richard Branson, currently worth $4-5 billion, started first by establishing Virgin Records and then, of all things, an airline. At present, he has a controlling interest in over 400 different businesses.
Of course, most people get nowhere close to that many income streams or business ventures.
However, according to Tom Corley two-thirds of the millionaires he interviewed have three or more. For most, their success did not come overnight, but through perseverance, hard work, and continuous learning.
PASSIVE AND ACTIVE INCOME SOURCES
There are two basic ways of generating income. Most millionaires have a blend of revenue, that is:
1. Actively managed—exchanging time for money. The most common way this occurs is through a job that pays a specific hourly wage.
2. Passively managed—by being paid for the use of savings and investment. Someone else manages your investment. This kind of income can also include stock dividends or bond payments (more about this later).
Sharp-eyed readers will note that growing item 2 is the means by which retirement independence is achieved.
Now, you might say that this view of things is an oversimplification. After all, there are plenty of people who invest in their own businesses and generate their salaries that way as well. But bear with me. The distinction between any revenue generated by the use of time versus that of money is critical.
THE ADVANTAGES OF MULTIPLE INCOME SOURCES
There are a lot of reasons the goal of achieving multiple income sources makes sense.
Security is one virtue. With multiple sources of income, if one source is eliminated (such as a job), others remain. That allows for income to keep coming in, even if there are problems in the general economy, or if an investment fails.
Moreover, cash flow can be smoothed out. You see, multiple sources of income can come from entirely different kinds of business ventures and investments. When one source of income is down, it often happens that another has strength. So, they balance each other.
Finally, when income reaches a high enough level, the risk of starting an entirely new venture is reduced because there is a financial cushion. That, in turn, allows for the chance for new income streams to be generated at lower levels of risk.
WORKING TOWARD FINANCIAL INDEPENDENCE VIA PASSIVE INCOME
Before we go on to list various kinds of passive investments, it is essential to note that the goal of every MMH reader should be to eventually have enough passive investment income to cover retirement/living expense. By its definition, retirement is possible once that goal is achieved.
There will be more about that in future posts.
ACTIVE REVENUE SOURCES
Here are a few examples of the exchange of time for money/revenue sources.
1. A job—compensation is usually expressed as dollars per hour unless a job is solely commission based. However, if you are just starting out, that can mean minimum wage. If you are Amazon’s founder, Jeff Bezos, it is about $9,000,000 an hour.
2. A second job or gig—many second jobs are designed for nights and weekends—after regular business hours. Or, they can be gigs like driving for Uber or performing small jobs for Task Rabbit.
3. A business—this can be a retail business, a rental you manage, etc. For instance, in my family’s case, we have rental properties we hold and operate.
4. A side business—this can be as complex as reselling goods on Amazon on your time off, or as simple selling your own artwork online.
PASSIVE REVENUE SOURCES
Passive revenues come from investing savings, not from the use of time. Since most millionaires have more than three sources of income, saving money and reinvesting it is the means by which most new revenue sources are developed.
Put another way, without savings; it is challenging to develop passive sources of income. As a rule, millionaires save (MMH) a higher percentage of their income than others. Reinvestment is the reason their wealth grows.
Here are some examples of passive revenue sources. These do not cover every possible form of investment, but are only aimed at defining the most basic types:
1. Real Estate—while the real estate itself generates rental income, all passively managed property is managed by someone else (not you). For instance, investors can invest in Real Estate Investment Trusts (Reits), Crowdfunding, or through more direct investments in Limited Liability Companies (LLC’s). In each case, management companies deal with day to day management concerns.
2. Stocks/Businesses—this entails ownership of a stake in a company, but not involvement of its management. Investment in companies allows for gains in company (stock) value or through the distribution of income through dividends. Unlike bonds, the risk is that a company can go out of business and that investors can lose their investment. For instance, notable companies that have gone broke include Gymboree, Enron, and Jawbone.
3. Bonds/Lending—this arrangement occurs when investors lend their savings to companies or individuals and expect to be repaid along with additional cash that is profit. They are not owners of the company they lend to. For instance, suppose you took out a mortgage loan from your bank. The amount of interest is part of the profit the bank earns from lending to you.
4. Royalties—these are payments for the use of a property. For instance, they can be payments to a musical composer each time performance of their work occurs. Or royalties can be payments made to an inventor for the use of a patent.
SUMMARY
1. Most millionaires have multiple sources of income.
2. Generation of numerous sources of income has the virtue of reducing economic risk.
3. Income streams come from exchanging your time for money, or from the use of the money you have saved.
ACTION PLAN
1. Much of millionaires success comes from their savings and investment. So save.
2. Aim for at least three sources of income. Most millionaires have at least that many.
3. To achieve three sources of revenue, expect that continuous learning and hard work will be important. Moreover, diversification takes time.
Disclaimer: consult with a financial professional before taking any steps outlined here. Not all advice may be suitable for your circumstances or investment style.
Photo Credit: Achraf Baznani. License link here.