Why You Need to Spread Your Income

I remembered a childhood discussion I had with my father today about the importance of a stable job. He would implore me to work hard, get a good education, then climb onto the corporate ladder. A good job, he would say, would provide all the income I’d need. Funny thing to remember as we still come to grips with the world economic collapse. This advice belongs in my childhood and should stay there forever, like Peter Pan, in never never land.

Those days are long gone. Today, we need to look at our income sources much differently and spread our income generating sources based on the likelihood of income risk. The riskier your income sources, the broader based your portfolio should be. If you have a stable government job as your primary income source, your risk exposure will be quite low. In contrast, if you have a manufacturing job as your primary income source, your risk exposure will be high. This is so because its existence will be tightly tied to the health of the economy. When the economy weakens, so does the need for a company to reduce the number of jobs. Unfortunately, this is precisely when you need the job the most. As a result, you need to diversify your income sources to reduce your risk exposure.

Like all investments, you should ease into diversifying your income. The more successful you become at generating alternative sources of income, the greater opportunity to further diversify. There are several types of income that people can earn: earned income – the type we gain from the nine to five grind; residual income – the type we gain from things like rental income or royalties; and finally, investment income – the type we gain from interest or dividents on our investment.

Here is a primer for how you could spread your income sources:

Newbie:

Earned income: 90%
Residual income: 5%
Investment income: 5%

Balanced:

Earned income: 70%
Residual income: 10%
Investment income: 15%

Leveraged:

Earned income: 60%
Residual income: 20%
Investment income: 20%

To better manage your income risk exposure take the time to find the right income mix for you. This simple approach will save you from childhood advice once and for all.

Have you found your income mix?

Feel free to share your answer in the comments.

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One Response to Why You Need to Spread Your Income
  1. Starting Your Own Business May Make You Happier | Hull Financial Planning says:

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