It’s important that you diversify your income with passive income. Doing so is an insurance against whatever life may through your way.
Just a few short years ago I began taking on more responsibility at work, which lead to me bringing home bigger paychecks and enjoying cushy employee perks. That extra income and those perks got us to a point where we *finally* had a bit of financial breathing room. We took full advantage and began to get our financial act together.
Life was awesome! But the financial progress we were making came to a grinding halt the day I lost my job.
Why It’s Important to Diversify Your Income With Passive Income
During my exit interview I was fed the line “you’ll be an asset to any future employer.” But a full year after getting fired I was still unemployed and struggling to pay bills. The pressure was mounting, life was getting harder by the day, and something needed to give. All because I didn’t have that paycheck coming in.
My only source of income disappeared when I lost my job and I was screwed.
I wondered how different life would be if I’d started the small business I’d always talked about or maybe bought my first rental property before losing my job? I’d have given anything to have another source of income during these desperate times.
The “don’t put all your eggs in one basket” advice made sense for investing because a diverse portfolio helps smooth out turbulent times in the stock market. But I hadn’t really heard talk about the need to diversify my income.
Having multiple streams of income would definitely have softened the blow of losing my job.
Why Multiple Income Streams Matter
If your full-time job is your only source of income, you’re flirting with financial disaster. If you don’t know someone personally, you’ve probably heard stories of people losing their jobs with no warning at all. Unless you’re out of debt and you’ve stashed a big chunk of money in an emergency fund, having different types of income streams provides not only some cash each month – but it may buy you more time to find a new job.
If you’re still hard at work at your 9-5, diversifying your income means additional money comes in each month because you’re earning money from multiple sources. And the more money you have coming in, the more money you can put to work. The most efficient way to reach financial independence is to have your money making you more money!
Different Types of Income
Before we talk about great ways to put your money to work, let’s review the two main types of income.
Earning an income implies you are actively doing something to receive that income. The most common type of earned income comes from working a full-time or part-time job. Each day you go to work, you’re trading your time and energy for money. And many people have a love-hate relationship with earned income; they hate their job but love payday!
Your full-time job is your biggest and most important source of earned income. As you consider different types of income streams, don’t neglect your full-time job in pursuit of side hustles or passive income opportunities. Remember, your full-time hustle is your most important hustle!
In the pursuit of financial independence, walking past dollars to pick up spare change rarely make sense.
The pros of earned income?
- Even though it takes your time, it’s an easy way to make money. You also don’t need money to generate more earned income, you just need time.
The downsides of earned income?
- The biggest downside is giving up control of your time. And when you stop trading your time, you stop making money.
- Your earned income is also typically taxed at the highest rate possible.
Generating passive income is much more hands-off because it requires little to no effort on your part to keep making more money. And who wouldn’t want that? Having your money making you more money is the holy grail!
Investment income is the most common and easiest type of passive income to generate. Once you buy dividend-paying stocks, high-yield bonds, or deposit money into high-interest savings accounts, your money starts making more money without any more help from you.
The pros of passive income?
- You make money 24/7 – while you’re sleeping, on vacation, or when you’re at your full-time job or side hustle. No matter what you are doing, your money continues to make more money. And the passive income you make is taxed at a lower rate than the money you earn by going to work.
The downsides of passive income?
- It takes money to make money. And if you don’t have a lot of capital to invest, it takes a long time to build a substantial amount of passive income.
There are plenty of click-bait headlines and misleading articles adding to misconceptions about passive income. Remember, to truly be passive it requires little to no effort to maintain the income stream.
Blogging and podcasting are NOT examples of ways to make passive income. Driving for Uber and being an Instacart shopper doesn’t create passive income either. If you are a real estate investor who leaves all the work to a property manager, your profits qualify as passive income. But any landlord will tell you that while there are days where your profits feel passive, dealing with tenant and property problems is definitely work.
Different Types of Passive Income
There are many ways to improve your financial situation and to diversify your income through passive income streams. Below are a few different ways to get started.
Interest income is generated when your cash is out there earning you money. Most people earn a little bit of interest income from their checking and savings accounts. Here are a few ways I’m earning interest income, and some other options for you as well.
Checking and Savings
- T-Mobile Money’s tagline is “Not Another Bank. A Better One.” Everyone is eligible to sign up for T-Mobile Money regardless of their cell service provider, but T-Mobile customers get a whopping 4% on their first $3,000 and 1% on everything else. Non-T-Mobile customers get a flat 1% interest on deposits. As a T-Mobile customer myself, I’ve been using this service for a couple of months now and have been pleased with the experience and love the 4% interest I’m earning on my emergency fund stash.
- Marcus (by Goldman Sachs) offers an online savings account currently paying 2.25% Annual Percentage Yield.
- Beam is an online bank account that pays 2% interest but allows you to earn up to 4% through gamification. You can read my in-depth review of Beam right here.
- CapitalONE 360 offers a savings account paying 1% with no games or balance limitations. This is where my family has done our primary banking for years. We’ve been very pleased and I can recommend CapitalONE without hesitation. Use this link to create your account and each of us may get bonus incentives.
- Depending on the amount of money you have to invest and your timeline to keep it invested, Certificates of Deposit (CD’s) are becoming popular again. Ally currently offers 2.75% interest for a CD with a 1-year term and no minimum investment.
- Stashing some funds in a money market account is another way to earn interest. Money markets are interest-bearing accounts usually paying more than traditional savings accounts. For a $100 minimum deposit, you can open a money market account at CIT bank and earn 1.85% APY. Higher opening deposits can earn you a higher rate at other online banks such as Capital One or Ally.
- If you have a paid for property you plan to sell, you might hold the mortgage and act as the bank for a new buyer. You’ll typically get paid a down payment and then principal and interest payments for a period of time before a large “balloon payment” is made to pay off the property. I’ve not done this myself, but it’s a good option for some if you’re looking to generate some passive interest income.
- Peer-to-peer lending may come with higher risk but you’ll be rewarded with higher interest rates too. An initial deposit of $1,000 sets you up to invest on LendingClub’s platform. Depending on the loan grade, interest rates on loans varies from almost 6.5% to just over 27%. Tempting, but a bit too much risk for me personally.
When you own dividend stocks, you get paid a portion of the company’s earnings for each share you own. You can earn dividends when you purchase individual stocks paying dividends or through a dividend mutual fund.
Want an even simpler option? Buy index funds!
Rentals are one of the most popular and stable ways out there to earn income, but remember it might not be a passive income stream! Renting out a room or your whole house on Airbnb falls into that same category. It’s not really passive income if you are spending time booking guests, meeting with them, and cleaning up after they leave. If you hire the work out, it becomes a much more passive form of income.
You might consider investing in real estate investment trusts (REIT’s) too. They give you many of the benefits of investing in real estate without the hassle of owning physical property.
If you sell an appreciating asset like your home or stocks that are worth more than when you bought them, you might consider your profit to be passive income. Just keep in mind the IRS has its own definition of passive activity when it comes to paying taxes.
Profit From Product Creation
Writing blog posts or a book, recording a song, developing an app, taking photos, or creating an e-commerce store are all active ventures. But after you put in the initial work, when people pay for the use of your property or buy your product – it becomes a form of mostly passive income.
Adding display advertising, getting paid per download, or using affiliate marketing probably take more work than buying a CD or dividend stock – but they’re meeting your goal of different types of income streams too.
Bank Bonus Hacking
Sticking to one bank is a thing of the past! Opening bank accounts for the bonuses they pay out is another passive income opportunity. While many require a direct deposit, a minimum balance, and leaving the money in the account for a certain time period – you and your money may be able to make hundreds (or even thousands) of dollars each year from opening new bank accounts.
Credit Card Hacking
We’re not talking about hacks that lead to fraud – but those putting money in your pocket for little to no work! There are plenty of ways to “hack” credit cards and earn passive income through sign-up bonuses, cash back, and other rewards.
Some cards offer bonuses of up to $500 cash back after meeting a minimum spending requirement. Others offer 6% cash back on grocery purchases or 5% on rotating categories throughout the year. You have to pay off your monthly balance each month or credit card hacking can cost you money, rather than making it!
In the past year alone I’ve used credit card travel hacking to take my family of six to Hawaii for a week, and my wife and I spent two weeks in the Mediterranean, visiting places like Athens, Santorini, and Rome.
For the European trip, we used rewards from our American Express Hilton Honors (150,000 bonus points) and Delta SkyMiles (40,000 bonus miles + statement credit) cards to cover airfare and hotels.
Diversify Your Income With Passive Income
You probably see the importance of diversifying your income streams now, in addition to your investment portfolio. Don’t neglect your full-time job because it is such an important income source, but embrace the saying “expect the unexpected” too.
It’s important that you diversify your income with passive income if you want to increase your chances of reaching financial independence.