When most people think of income, they are likely thinking of earned income – that is, a job (or several jobs) where they exchange hours of their time for wages.
While this is the most common way to earn income, I would challenge you to think of other ways of bringing in money. And yes, do this even if you love your current day job, manager, team, and company.
So why should you think beyond your 9-to-5 when it comes to building income?
Think of how you would feel if you relied 100% on your earned income in the following situations:
- Unexpected layoff
- Unforeseen furlough
- Management shuffle where your awesome boss gets replaced by a new manager who is an absolute nightmare
- Toxic workplace environment
- Harassment
- Your position being outsourced to a country where wages are cheaper
- Your position being relocated to a city with a lower cost of living
- Your position made redundant by automation or AI
Even if you love the nature of your work, there are many situations that are completely out of your control that can heavily influence your day-to-day happiness and overall job security.
So how can building multiple income streams mitigate these risks and help bring you closer to financial freedom?
MAXIMIZE INCOME AND GROW THE GAP
Growing your wealth boils down to a simple equation of growing the gap through maximizing your income and decreasing your expenses:
Income – Expenses = Savings
To grow your savings, you need to both increase your income and decrease your expenses.
Expenses are usually the easiest to tackle and see immediate wins. However, you can only cut so many expenses, and there is a limit – you can’t cut them down to zero. People still need food, shelter, and safety.
While income has unlimited upside, it can take time to grow your income. It takes time to build up experience that can command higher rates or a higher salary. It takes time to build up a good rapport with your manager and your coworkers while building your case to get promoted. Job hunting and interviewing to get a salary bump at another company can also take time, which is why some people refer to it as a second job.
Your journey to financial independence will be boosted if you not only focus on prioritizing your spending so that is in line with your goals and values (and cutting out those that don’t matter), but also focusing on increasing your income. The more income sources you have, the more you can add to your potential income overall.
DIVERSIFY RISK
Have you ever heard of the expression of not putting all your eggs in one basket? You’ve probably heard it frequently used in the context of investing. The common advice is to maintain a diversified portfolio so that you have a balance between risk and return, reduce volatility to your portfolio over time, and spread out your investments to ensure that no one asset is overexposed.
The same benefits apply to diversifying your income streams. Most people have only one source of income stream: their earned income. Their risk is heavily concentrated on their one income producing asset. If they get laid off, fired, are made redundant, or have their job outsourced or automated, then they lose 100% of their income. In an age where people no longer work for the same company for their entire lives and where job security can often be seen as a mirage, this is a clear and present danger.
As with your investment portfolio, it is important to mitigate your risk of lost income by spreading out your income sources.
HEDGE AGAINST OUTSOURCING, AUTOMATION, AND AI
Not many jobs are safe against the progress of automation and AI. There have been industries and jobs lost to automation in the past, and there are jobs that are in danger of this in the near future. Think of how companies like Uber, Cruise, and Apple are all working on self driving technology that will one day render jobs – such as taxi drivers and long haul truck drivers -obsolete.
This trend will likely continue for white collar positions like programming and accounting. Part of my job is “process improvement” and looking for ways to automate the manual parts of my jobs. I can’t help but think that eventually, we’re going to be automating ourselves out of a job. The roles in my field that are more about data processing have already been outsourced to countries like India by companies that are household names.
Companies and executives are probably salivating at the idea of having a workforce comprised of AI rather than of people – after all, for those who only care about the bottom line and shareholder value, it seems to be game changer: AI won’t complain about wages, demand benefits and raises, request for vacation or sick time, have family obligations, or sue the company for discrimination or unsafe working conditions.
While you are expendable to your company, you can hedge against outsourcing, AI, and automation with income sources outside of your day job – whether this is investment income, real estate income, or business income where you are the face of your brand.
COUNTERACT WAGE STAGNATION
According to a Pew Research article, today’s wage after accounting for inflation has the same purchasing power it did 40 years ago. Any wage gains have primarily flowed to the highest paid workers. Unfortunately, most people rely on their primary job for income gains – ie, a raise, cost of living adjustment, or promotion – rather than on their investment income.
The problem with this is that since the early 1970’s, hourly inflation-adjusted wages have grown only 0.2% per year. This means that although the economy has been growing, most people’s primary way of benefitting from that growth has stalled.
If your investments were only growing 0.2% per year, this would not be considered a great investment. You would probably get better growth from a high yield interest savings account. Why do we accept having one job as our sole source of income that grows peanuts year over year as our productivity increases disproportionately to our wage gains?
To maximize your income and combat wage stagnation, it helps to look at other income sources where the output you receive is more in line with your input, ie time and effort.
PURSUE UNLIMITED UPSIDE
I will never forget the time that I worked at one company, when during the annual compensation talks with my manager, the conversation went something like this:
Manager: So you’ve done really well. I’ve given you “Exceeds Expectations” in many of these categories in the performance review.
Me: Great!
Manager: Here is your compensation award, effective XX-XX
Me: …
Manager: Because the stock price has done so well, you have maxed out of your compensation band. So we can’t give you a higher base salary adjustment than this.
Me: Wait, why are we being punished for the company doing WELL?
Manager: That’s just how the compensation model works here. It’s out of my hands.
I have worked at so-called booming companies in so-called booming industries. Even though the company may be raking in billions in income per year and experiencing double digit revenue growth year over year, this does not mean that the average worker is experiencing the same growth in their salary.
Every company has their own compensation model, but most companies that I have worked at or had as a client looked something like this:
Each role is put into a certain “level”, which has its own set of criteria and expectations. Each level within each department has its own salary band. Even if the company is doing really well, you may be restricted from receiving a raise if you are maxed out of your pay band. Some companies even restrict you from getting a sizable raise in your base salary if the stock outperforms, in which you may max out of your compensation band. This makes sense when it comes to executives who expect most of their compensation to come from stock based compensation, but not much sense with the average worker.
Unless you are an executive or have substantial amount of equity, there is really limited upside at your typical 9-to-5 role. While you may not be able to rely on your 9-to-5 for the growth in wages that you would like to see, you can boost your overall income growth through other income sources that have potentially unlimited upside.
ACHIEVE FLEXIBILITY IN YOUR LIFE
Doesn’t the idea of being able to set your working schedule to fit your personal life sound much better than trying to fit your life around the very inflexible corporate culture of the typical 9-to-5?
While there are remote friendly jobs, many companies do not support 100% remote working, even if the nature of the work, technology, equipment, and infrastructure are there to support this arrangement. Even with remote jobs, you may need to adhere to a working schedule that conforms to the time zone of the company headquarters and put in at least 40 hours each week.
With other income sources supporting your lifestyle and goals, you can have the flexibility to scale back or walk away from your 9-to-5 in pursuit of the life you want to live. Most people may want to spend more quality time with their family and friends, have more opportunity to explore the world, or maybe have more mental space and energy to fully pursue their hobbies.
ESTABLISH FINANCIAL STABILITY
Gone are the days where you would work at the same company for your entire career and receive a nice, healthy pension when you retire. Change is the only constant, and not all of them have been to the benefit of the average worker’s sense of job security.
You may love your job, your boss, and your team. You may think that your situation will be stable for the rest of your career. In reality, there are many forces out of your control that can push you out of your job or make your working life miserable: struggling economy, new management, new boss, activist investors, slowdown in company growth, cost cutting initiatives to keep shareholders happy, layoffs, outsourcing, redundancy, harassment, and toxic workplace environments.
Having other sources of income can smooth out the bumps along the way and fill the gaps of lost income. It allows you to put your mind at ease when you find yourself out of a job, to walk away from an unfavorable or toxic situation at work without worrying about the loss of income, and to have that invaluable feeling of being secure in your financial situation.