Most people rely on one main source of income. For an employee, the main source of income is the monthly salary, in exchange for your service, working for a company.
Nowadays, job security is not really being bragged about. You can say that the salary income is stable but it is not really secure. During the past festival celebrations, ask yourself did you tell your friends that your job is pretty secure and that you are happy about it? Did you tell your family and relatives that you are being paid more and required to work less? If yes, I would like to congratulate you and please also introduce me to your boss. Maybe being employed is not a bad idea after all!
In reality, you’ll most probably find that 9 out of 10 employed workers will complain about their hectic lives, inadequate salary, and demotivating office politics.
Problems with Single Source Income
When you think of it, it is quite risky to only have one main source of income. What happens if your boss fires you all of a sudden? What if your one and only major client switches to do business with your competitor? What if your only restaurant outlet had a food poisoning incident and is forced to close down?
To prevent these nasty situations, you’re commonly advised to have another source of income or even multiple sources of income. Likewise,
it is better for both husband and wife to produce income rather than relying on only one sole bread-winner.
The Actual Value of Having Additional Income Stream
First, I want to share with you the actual value of having an additional source of income. Let’s say you have an additional income of RM500 per month, on top of your main source of income. How much capital do you need to set aside to get this amount of return every month?
To generate an additional RM500 interest income from a fixed deposit account, you’ll need to put in RM150,000 in the FD account that’s giving 4% interest per annum. So by putting an effort to generate that additional RM500, it is equivalent to having RM150,000 in Fixed Deposit. By comparing it this way, the additional income is, in fact, worth that much if the income is totally passive.
To generate passive income from investment, cash capital is required. In the example above, the capital is huge if the rate of return you manage to get is low, or you can’t stomach higher investment risk.
As most people who start off without much financial capital your alternative to generate an additional source of income is to invest your time and effort. So don’t look down on this because your time and effort are worth a lot, as elaborated above!
Are multiple income streams better?
Now, I might have already convinced you to build up additional sources of income. But is it true that multiple income streams are always better?
For example, George is an accountant working in an accounting firm. In order to have more sources of income, he does freelance photography on the side. He also tutors some primary school students at night. Further to that, he trades commodities during odd hours. Furthermore, he also joined an MLM company selling some health-related products.
What he ends up with is having multiple jobs that are taking up most of his time. He works too hard and after weeks of tiring work, he couldn’t even perform his day job properly. Is this a wise move? Certainly not. I really don’t recommend you to get into the kind of situation like George.
I would prefer to have only a selected few big sources of income, rather than having many small and negligible streams of tiny income. If you are like George, trying to build multiple sources of income by performing such diverse tasks, my advice for you is to stop and ponder. Assess the hourly rate and the future potential income increment from each income source. Then focus on a selected few that you are passionate about and can be turned into an established business. Don’t just slog like a money slave.
So it is about striking a balance. Undeniably, you should have multiple sources of income. But it is better to have multiple sources of income in the same field that you can easily scale, leverage and replicate.
Having Diversification, not “Diworsification”
In the investment world, asset allocation means you have a portfolio in different asset classes such as commodities, currencies, equity, bonds etc. It is well-known that you need diversification, which reduces risk and can increase potential returns, by minimising the negative effect of any one asset on portfolio performance.
But when done wrongly, you may end up with “diworsification”, which is going to pull down your overall return. It gives better return if you are only investing in a few selected stocks that are all winners.
Similarly, you would want to diversify your income, but not to such an extent that would make your return worse. The key point here is to create multiple sources of income from your existing one, so you can leverage, replicate and scale!
Create Multiple Sources of Income from your Existing One
If you are employed, it is hard to have diversification. You couldn’t possibly work for several companies at the same time, could you? If you are a self-employed person, you have the option to choose customers and work with a diverse group of clientele.
In business, it makes sense to have multiple clients rather than just having a handful of major customers. For example, I know a friend who is very successful in the photocopy machine business. His company has a few thousand customers. His customers are small businesses from different industries. So even during economic recession, I think his business will still stand. Even though the market size might shrink and some of his customers might face financial difficulty, some might even be thriving during the economic recession.
It also makes perfect sense to have several products on sale. So when Product A is not selling as good as it used to be, you’ll have Product B and C that make up the sales revenue.
Just to quote another example, when
I was a full-time musician (about a decade ago) I performed at a five-star hotel lounge and also other music cafes. In fact some of the cafes closed down but there were new ones that opened later at different locations. I did music production during the day time. I wrote a new song every week, hoping to sell to some major artists. I even published my own solo album so that I could sell it during my performances. At a later stage, I switched completely to the financial industry when my life priorities changed.
In my current business, I get paid from my book royalties, online financial courses, membership site subscription, commission from affiliate sales, advertising revenues, commission from financial products, referral fees etc. It is all related to what I’m currently doing, the core business is to educate the public on financial literacy.
As a summary, you can create additional income by leveraging on your existing main competence. It is much easier, and also much more secured. Do it now.
Author: KC Lau
This article was first published on 27 December 2017
Read more: High Net Worth Women and Personal Finance