Several years ago I picked up a copy of Robert Allen’s book Multiple Streams of Income and read it over the course of a weekend. I don’t remember it as being a terribly substantial book, but the premise has stuck with me.
To be a prudent investor, one must diversify their investments. When you think of diversification though, I’d also like you to think about it in terms of your income streams, not just your investments. It is important to diversify your income streams for many reasons.
The primary reason to develop multiple streams of income is for a reason I like to call “income redundancy”. By having multiple streams of income, if any one stream dies off for whatever reason, you have other streams to help keep things going. If you get laid off from your job, having a second stream of income may help to deal with the cash flow crunch while you find a new position. If a tenant moves out of your rental property, its nice to be able to use your stock dividends to help cover your rental expenses during the vacancy.
The second reason to work towards multiple streams of income is what I call “income home runs”. Just like with investing in several different stocks, its nice to have several streams of income operating simultaneously in case one really takes off. An example of this for me is trying to have a stream of income coming in through online advertising. While my online advertising income through Google Adsense and Commission Junction is a drop in the bucket compared to my salary, it is another ‘iron in the fire’. If any of my various websites take off, my online advertising income has a chance to greatly increase. Without having this stream in place at all, I have no ability to capitalize on any unexpected bump. The same logic goes for stock dividends in regards to raised yields or one-time special dividends or even rental income if the rental rates in your area increased dramatically due to nearby development, community improvement, etc.
Lastly, having multiple streams of income can offer tax benefits. As we all know (and Ron Paul loves to comment on), the income tax system is very complex. Tax rates differ based on income type. Short term capital gains, long term capital gains, dividend income, rental income and standard hourly/salary income can all be taxed differently. Consult with a tax accountant to find out which types of income may benefit you most, but diversifying your streams of income could have a noticeable impact on tax rates. You may be able to defer some types, deduct portions of some types or have some types taxed at lower rates than the others.
Now, the fun part. There are lots of blogs, books and online communities about creating multiple streams of income. Please, leave a comment with your favorite resources online or a quick note about what you have done to acheive multiple streams of income. Do you have a hobby you capitalize on? A small business you run on the side? An effective divident portfolio that you use to supplement your standard income? Let me know! I’d love to hear about it and share it with others. To get you started, I recommend looking at the Rich Dad, Poor Dad Forums. There are a lot of entrepreneurs in the forums that are happy to help folks work through their ideas.
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