Cash Flow: Diversifying Income

Diversifying our investments is advice nearly every financial adviser gives their clients. "Don't put all of your eggs in one basket", they'll say. Most of us follow this advice by investing in a mutual fund or a variety of mutual funds.

Career advisers don't tend to give the same advice, yet it is just as important of a principle. Very few of us diversify our income very much and risk losing our income stream with a single job loss.

Who needs to diversify their income?

The short answer is we all do. Diversifying income becomes less important as you near being independently wealthy. That only applies to a small set of our population though. If you're dependent on your current income to live, look around for ways to introduce variety into your income.

How can we diversify income?

Turn a hobby into an income stream. A friend of mine has a full time career in technology and has leveraged his knowledge to write a blog to share his knowledge with other coders or PC users. It is unlikely to ever replace the income from his regular job, but it can create enough income to help his family get through a period where he is unable or forced to not work.

Many couples diversify by being a two job family. Having both spouses work is a mechanism for managing cash flow all the time. It's an equally valuable method for reducing income risk. The loss of one spouse's job would hurt, but it would enable the couple to minimize withdrawals from an emergency fund if one job were lost.

Build a business with excess cash flow from your current job. A close friend of mine grew up with an electrician, farmer, rancher dad and a dog raising mom. They started out with an electrical business. When the electrical business had good years, they used their excess income to fund the beginning of their farm. Later they started raising beef cattle. Several years after starting their ranch the electrical business had a couple bad years while the agriculture business was doing well and carried them through what may have been a very difficult cash crunch without a diversified income stream.

Passive income streams are one of the best way to reduce risk. Passive income is derived from something that doesn't require you to work at it all the time. My friend's Dad slowly made his electrical business passive as he handed the day-to-day operations over to another family member. He still owned the business and managed it from a high level, but he didn't have to go to work there every day to keep the income. Another passive income alternative is owning rental properties.

How much do I need to diversify?

The more diverse you can be the higher chance you'll have of managing through an income crunch. Building several streams of income that don't depend on one another will help.

Spreading yourself too thin is as big of a risk as putting all of your eggs in one basket. By building five or six $10,000 income streams you'll have a great deal of flexibility. You might also struggle to turn any one of them into a $100,000 income stream.

Find the balance that works for you between having only one source to fund your life and protecting the income side of your cash flow.

What are some of the best ways you've found to generate extra or more diverse cash?