• Thursday, May 30, 2024
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How diverse is your income?


One of the important lessons that should have been learned from the recent recession is that income diversity is an important aspect of your finances. With the massive layoffs seen in the economy during the recession, and the difficulty with finding a new job in a slow moving employment market, it is clear that relying on one source of income can be a real problem.

Income diversity 

When your income is diverse, it means that it is coming from different sources. For your family finances, this might mean that you and your spouse both work — even if one of you has a part-time job instead of a regular 9 to 5. Or, it might mean that a stay at home spouse uses the Internet to start a side business, selling products or services. The idea is that you have another stream of income so that if you lose one of your income sources, you still have money flowing to your bank accounts. This can reduce the rate at which you withdraw from your emergency fund, helping your money stretch further during tough times.

Income diversity doesn’t have to be all active income, though. There are ways to cultivate more passive streams of income as well. Many people find that dividend paying investments can be a good way to encourage income diversity. You regularly receive cash from dividends paid, and you can either reinvest that money, add it to your emergency fund, or even spend it. If you get a regular stream of income from dividend investments, or even from bond investments (you will get regular interest checks), you can use that to help shore up the situation if a job loss becomes a reality.

Other streams of income can include participation in affiliate programs online, receiving royalties from a book you have written, and even the wise use of an inheritance or other unexpected windfall. Before you spend that money, consider how some of it could be used to help diversify your income for the future.

Working from home: Income diversity 

When you work from home, it is important to consider income diversity as well. As a freelance writer, I make money by providing a service to clients. Some clients pay more than others. However, I am careful to make sure that no single client accounts for more than 1/3 of my income. If I were to become too reliant on a single client to provide most of my income, it could cause real problems if that client could no longer work with me. Indeed, at the height of the recession, one of my bigger clients cut his order by half. Luckily, I had enough client diversity to be able to absorb the change while I looked for new business to fill the gap.

Bottom line 

You might have a job that provides the bulk of your income, but you should also have a backup source of income. No, a part-time job or a hobby business is not likely to replace the income and benefits you receive from a full-time job. However, if you pair income diversity with a well-established emergency fund (and, of course, unemployment benefits), your money will go further in a job loss situation, and you will have greater peace of mind as you search for a new job.