Photo by Alexander Mils courtesy Unsplash.com
Building wealth is such a mysterious thing for most people. It certainly was for me for most of my early adult life! Sheepishly, it wasn’t until I was about 35 years old before I started to put the pieces together on what would become a successful wealth building strategy. Unfortunately, that was a ‘little’ before the Internet and way before I even heard of the phrase multiple streams of income.
However, what there was was the same old equation that still exists today. Nothing really has changed except for the fact that a LOT more people have figured it out now than when I was starting out and they’re finding out a lot sooner, thanks in large part to online resources and communities.
What this ‘equation’ is in fact is one of the secrets to building wealth. Listen closely!…it’s as follows: If you were to have more streams of income than expenses, you would be wealthy.
Well that’s obvious now isn’t it? Well…it should be but I’m going to tell you that it isn’t so obvious as it should be. Here’s why.
A primary job is the goal for most people
Most people strive to have one source of income, their ‘job’, where they trade hours for dollars. They are content with this one source of income and believe that it is sufficient to fund their life for the rest of their days. As such, they immediately start to consume.
First, it’s the essentials; housing, food, transportation and medical expenses. Then it’s the ‘life support’ costs; insurances, utilities, phone, cable, gas and internet. Then shortly thereafter comes the mindless binge spending on a monthly subscription of Netflix, magazine subscriptions, a food service, a monthly ‘box’ with whatever inside is your fancy; meat, makeup, clothes, shoes, tools, etc., etc. And the spending just continues to mount until you’ve reached the point where you now have 40 to 50 ‘lines’ of monthly expenditures to contend with.
Daily expenses get baked into your lifestyle
Now here’s where the equation comes into play…on one side of the equation you have these now 40 to 50 lines of what now have become baked in ‘structural’ monthly costs. Yet…on the other side of the equation you have just this ONE stand-alone figure, your monthly revenue from your 9 to 5, cowering to offset this ominous mound of seemingly endless expenses. It doesn’t seem fair!
What is truly interesting to me is that I have had the chance to see quite a lot of personal financial statements over the years from what I would categorize as wealthy individuals. This was made possible in one of my past lives where I was involved in financing large real estate deals.
What stood out to me back then and more so even today, is that the individuals that had multiple streams of income tended to have the higher net worth. So that when all the expenses were added up, they had more than just one source of income coming in to not only offset these expenses but to create a gap sizeable enough to have helped them create wealth and have the asset value needed in order to do the deal that I was reviewing.
Multiple streams from multiple sources
In fact, in many cases these individuals would have four or five income streams from several sources such as business income dividends, paper asset investments (index funds, stocks, bonds) and rental real estate.
This lack of reliance on only one source of income and in fact, a diversified number of income sources where neither of them need to ultimately be relied upon, became the gold standard of how I wanted to craft my life. I’m certainly not there but I surely see the importance of being in this situation and I am aggressively working towards that goal.
The 20% Rule
In fact, over the years of observing the practice of building multiple income streams I have come to the conclusion that there is another ‘equation’ for wealth building. This equation is simply that you should strive to not have anymore than 20% of your income coming in from any one source.
Therefore, you would have 5 different income streams coming in with each one ideally not contributing more than 20% of your base level of expenditures. Obviously if you make additional income from any of these sources above and beyond that 20% contribution towards your base expenditures, you’d have those funds to invest in wealth building opportunities.
Now why 20%? Is there any magic in this? Now of course it isn’t a hard and fast rule or law but there is a method to the madness. We all realize…or we SHOULD all realize… that being 100% dependent on one source of income is insane, yet that’s what so many of us do by only having our regular job.
On the opposite side of the equation, it would be great to have 100 separate sources of income that bring in at least 1% of the income we need. Now obviously this would be nearly impossible for as many reasons as you could surmise. So a more reasonable expectation might be 3 sources of income generating 33% of our needs, 4 sources of income generating 25% or 5 sources generating 20%.
Why 5 separate sources?
The reason I have championed 5 separate sources of income contributing 20% of your income needs is due in large part for the need to have as much diversification as is practical. MORE importantly perhaps is the ability to both be able to scale any one of our income streams or ‘weather the storm’ should one income stream entirely drop off.
Now wait for it…here’s the magic in the 20%…it is SO much easier to be able to live on 80% of income at any given time than it would obviously be should you only have 3 income sources and lost one and were down to 66% of your income.
Now let’s do this again…how easy would it be to live on 0% of your income if you lose your job? YEAH! That’s literally the problem with having only one source of income. Yet that is what is conventionally sold to us in today’s society as the plan for financial success.
Admittedly, it took me until I was somewhere in my early 30’S to realize that the old financial plan sold to most middle-income Americans… the one that had you putting all your energy and prospects into one job in order to have ‘security’…seemed to be HIGHLY risky.
Why the one primary job strategy is risky nowadays
Interestingly enough, I started to see how risky this plan was even while I was working in a government job no less. You know, the type of job that is said to be the most secure job in the world? At the time, funding for the division in government that I worked for was continually being threatened to be taken away by the state legislature.
What hit me hit as particularly funny was that if a ‘government job’ which was touted by society as being the pinnacle of financial security would be up for elimination continually for the several years that I held it, then every job is vulnerable.
In fact, not only did this ‘secure’ job not turn out to be particularly secure while I held it, it also suffered from paying less than a comparable job in the private sector due in large part because it was considered ‘secure’. So ironically I gave up higher compensation for all the years I held that job, essentially paying a ‘security premium’ for a job that wasn’t even secure.
To add insult to injury they even decreased the amount of contribution being made to my retirement plan AFTER I had been working there for a few years. So now not only was my ‘secure’ job not even close to not being secure, the acceptance of a lower salary for a secure retirement was also a hollow promise.
Just to add to the fallacy as to how secure this job actually was, the last five years that I was in it I took a 3% pay cut each year just to keep my ‘secure’ job.
What I learned
The lesson I learned from that whole experience was several fold; First, unless you work for yourself there’s no such thing as a secure job. Secondly, when your financial security is in someone else’s hands you are completely at the whim of that person’s interest, integrity and memory. Thirdly, promises don’t equate into guarantees or money in your hand. Lastly, ‘secure’ is the ‘new risky’.
So what would be a reasonable initial multiple stream of income goal to strive for? I would suggest that the first two streams of income that are much more probable to obtain for most individuals would be to build a paper asset portfolio and start to purchase rental income property. I would recommend that the additional streams of income beyond these first two should be multiple business interests for a variety of reasons, one being the potential for economies of scale as identified below.
Although any business income would be substantial, I would add that the nature of the business is extremely important. More specifically, the type of business that is created is important in that it might lend itself to the creation of other income streams onto itself. If it’s an online e-commerce business, there’s a much higher probability that it could extend itself into other streams of income.
Conclusion
As an example, I know of a gentleman who has a highly popular online products e-commerce business selling bass fishing supplies. This core business also has provided him with the opportunity to have created a full line of online digital courses teaching specific aspects of bass fishing to his customers. He has also developed an online weekly subscription membership program for his loyal and committed customers looking for a much higher curated experience. With the backlog and growing content that he has developed for his weekly membership program, he has also created several e-books that sell on the Kindle platform.
In addition, this level of following has allowed him to move over onto the YouTube platform where has since surpassed the monthly viewers required in order to receive ad revenue.
This level of interest has in turn enabled him to be able to start an annual conference where his die-hard followers congregate to discuss, interact and learn about the latest equipment and techniques relating to bass fishing!
The compound effect
This one business alone has created 6 streams of income and there’s still opportunity to create a few more before it’s all said and done!
Not only is the creation of income from this business impressive on its own, it’s the choice of the business that more easily creates these opportunities that is so impressive! (In a later post we’re going to break down which niches would lend themselves to multiple income streams)
So for the majority of individuals out there…the ‘secure’ plan of having your day job as your only income stream is the ‘new risky’. In order to have REAL financial security you need multiple streams of income, streams that YOU control. And if you want to build REAL wealth…YOU need to be the one in control of these streams so as to be able to scale them when it’s possible!
