One
of the important lessons that should have been learned from the recent
recession is that income diversity is an important aspect of your
finances. With the massive layoffs seen in the economy during the
recession, and the difficulty with finding a new job in a slow moving
employment market, it is clear that relying on one source of income can
be a real problem.
Income diversity
When your
income is diverse, it means that it is coming from different sources.
For your family finances, this might mean that you and your spouse both
work — even if one of you has a part-time job instead of a regular 9 to
5. Or, it might mean that a stay at home spouse uses the Internet to
start a side business, selling products or services. The idea is that
you have another stream of income so that if you lose one of your income
sources, you still have money flowing to your bank accounts. This can
reduce the rate at which you withdraw from your emergency fund, helping
your money stretch further during tough times.
Income
diversity doesn’t have to be all active income, though. There are ways
to cultivate more passive streams of income as well. Many people find
that dividend paying investments can be a good way to encourage income
diversity. You regularly receive cash from dividends paid, and you can
either reinvest that money, add it to your emergency fund, or even spend
it. If you get a regular stream of income from dividend investments, or
even from bond investments (you will get regular interest checks), you
can use that to help shore up the situation if a job loss becomes a
reality.
Other
streams of income can include participation in affiliate programs
online, receiving royalties from a book you have written, and even the
wise use of an inheritance or other unexpected windfall. Before you
spend that money, consider how some of it could be used to help
diversify your income for the future.
Working from home: Income diversity
When you
work from home, it is important to consider income diversity as well. As
a freelance writer, I make money by providing a service to clients.
Some clients pay more than others. However, I am careful to make sure
that no single client accounts for more than 1/3 of my income. If I were
to become too reliant on a single client to provide most of my income,
it could cause real problems if that client could no longer work with
me. Indeed, at the height of the recession, one of my bigger clients cut
his order by half. Luckily, I had enough client diversity to be able to
absorb the change while I looked for new business to fill the gap.
Bottom line
You might
have a job that provides the bulk of your income, but you should also
have a backup source of income. No, a part-time job or a hobby business
is not likely to replace the income and benefits you receive from a
full-time job. However, if you pair income diversity with a
well-established emergency fund (and, of course, unemployment benefits),
your money will go further in a job loss situation, and you will have
greater peace of mind as you search for a new job.
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