Cultivating multiple streams of income is a sure way to achieve our financial goals quickly. However, we must be careful to maintain our quality of life and work-life balance. How then can we generate income passively, without spending unhealthy amounts of time working?
The concept of multiple streams of income is fundamental to wealth building and management, and we must understand this concept not only for the achievement of our financial goals but also because, a lack of understanding of it can lead to sacrificing our quality of life for the achievement of the goals. If we want to achieve our financial goals within the time frame we have allotted and maintain a good work-life balance, we will need to diversify our sources of income and create multiple income flows. Most of this income will be passive, whilst a few or just one would be active income. Active income is income that you have to continuously work for. If you do not work, you do not get paid. Our jobs/ businesses fall into this category. We must be actively involved before income can be generated. Passive income like the term implies does not require continuous work. The income is generated passively after an initial time of concentrated activity. Thereafter, income accrues continuously without our input. However, we would still need to periodically monitor the income source to ascertain it is meeting our investment expectations.
The various streams of income fall under these two main headings – active and passive incomes. Under active income we have two main income streams; earned income and profit income. Earned income comes from our job, the office we resume in every working day, whether as an employee or a business owner. This earned income is initially our largest income source but as we develop other sources, they have the potential to outgrow our earned income, and that should be our objective. When passive income outgrows active income, we have achieved true financial independence and we are working, not because we must but because we want to. Profit income is also an active income as it requires your continuous effort to generate. It usually streams from your business or “side hustle”. Profit income complements earned income to increase your financial resources.
Several income streams fall under the passive income heading including interest income, dividend income, rent income and capital gains income. Interest income is earned from money market instruments, essentially fixed deposits, treasury bills, and government/ corporate bonds. Interest income is fixed ab initio and guarantees the investor a certain return on investment. This is why money market instruments usually return the lowest yields. However, we now have the new asset class of crowdfunding/ peer-to-peer lending which are delivering good returns to their investors. Dividend income comes from buying equity in a business, either through the stock exchange for publicly traded companies or through private placements for smaller companies. We have the choice to invest in thriving businesses run by family, friends and acquaintances and earn dividends periodically just like we do from companies quoted on the stock exchange. Unlike money market instruments, dividend income is not fixed and can only be projected/ estimated from accurate historical financial data. Rent income is traditionally from real estate – residences, commercial (offices/ shops) and the new Airbnb short lease rent model. However, these days rent income can be generated from other assets. For instance, giving your car out to an Uber driver would also generate rent income. Capital gains occurs as the value of our investment assets continue to increase. Real estate value appreciates. Prices of shares bought from the stock exchange or even foreign currency and cryptocurrency grow with time. These increases contribute to the wealth of the investor as capital gains. However, the income is only earned when if the assets is sold. So, one company stock would generate dividend income and the same stock would accrue capital gains – a veritable source of multiple streams of passive income.
Passive income allows us to grow our wealth without sacrificing time that should be spent with family and friends. If we want to maintain a good quality of life and achieve genuine financial independence, we should focus on increasing our passive income sources.
But we should always remember that though passive income does not require continuous effort, we must exercise the due diligence demanded at the initial purchase stage to ensure that the asset we are investing in meets all our criteria regarding return-on-investment, liquidity, risk, and capital gains. After which periodical monitoring is also required to ensure the asset maintains its quality. A good measure of financial discipline is required to cultivate multiple income streams. Hopefully, this discipline would have become a habit and the rewards of it, sufficient motivation to keep us disciplined and focused on achieving our financial goals. Happy investing.