We’ve previously discussed reducing or eliminating debt and saving as ways of increasing cash flow (see other posts). Let’s look at other ways of increasing income through having multiple sources of income.
For most people (those who do not have wealthy parents or trust funds that is), their only source of income is their job. This to me is a very dangerous position in which to be, as very few people have real control over their job. Wouldn’t it be better to have income from a number of different sources over which you have some, more or all
Let’s look at this a bit more closely and I’ll explain why having all your income from only one source, a job, is so risky.
Firstly, you don’t really have much control over how much you can earn. Your income is limited to what is considered a fair hourly rate for the work you do, and it is then further restricted by the number of hours you are able to work or even, in the extreme, whether you will continue to work where you are. As an employee, you have absolutely no control over any of these factors.
For some people the obvious answer is to work longer hours, get a second job and/or to obtain further qualifications, but at the end of the day, you keep running into the same restrictions on hourly rates, and how many hours you can physically work.
It’s time to think smarter and look at generating multiple streams of income, particularly passive streams where the money just comes in whether you work or not, making money while you sleep. Time is the great equaliser, everybody gets the same 24 hours in a day. But some people manage to get more out of and done in their 24 hours than others. This is called leverage. Let’s look at other ways of increasing income through multiple sources of income by having a look at just a few options here, passive and active, and as for anything in life, whatever options are chosen, you need a plan to execute it successfully.
Firstly, cash is an obvious and fairly simple way. Cash in an account has the ability to earn interest. It is in effect, a loan to the bank and for this you earn interest.
There are a few ways to maximise interest, such as using term deposits, cash maximiser accounts and using virtual accounts or accounts paying bonus interest if you limit or don’t make withdrawals from the account. This can be as active or passive as you like, depending on how much you like or have the time to chase a good interest rate, or whether you’re happy putting your funds in a term deposit and letting it rollover at the end of each expiry. Government or private company issued bonds work in a similar way and are relatively passive investments.
There are of course a number of things to consider, such as tax implications, the inflation rate and the amount you’d need to sit in the account to get a decent return. As we are currently globally in
a low interest rate environment it can be difficult to obtain a reasonable rate on return on your deposits, especially if the inflation rate is the same or higher than your interest rate, which is in effect a negative return on your investment. Nevertheless, it is always a good idea to try and have some cash reserves.
Another potential source of income could be from shares. Technically as a shareholder, you become a part owner of this business. There are two ways of generating income this way, actively by trading shares, or passively by buying dividend paying shares.
If trading shares, this needs some careful analysis either through technical and/or fundamental analysis and I would strongly recommend doing a lot of research and reading into this, and preferably get training and/or a mentor to help you get started. You will need to have an account with a broker in order to buy and sell shares. The aim of all this is to buy low and sell high, or sell high and buy low, but always, always, always have a plan and trade within your plan.
The other option is to buy dividend paying shares and generate income from that. A dividend is a share of the profit that the company has made that is paid out to all the part owners (shareholders). If you don’t need the actual monetary income at a particular stage, you might be able to accelerate your shareholding by participating in a dividend reinvestment plan, if the company allows this (and not all companies do). If the company allows this, it’s a great way of increasing your shareholding without actually going out and purchasing more shares yourself.
There are more sophisticated instruments and derivatives you can leverage from shares once you have learnt the basics, such as buying on margin, put and call options, straddles etc. but these are beyond the scope of this post and are not recommended until you are a more advanced or sophisticated investor. Remember, that all income made through shares is subject to tax so consult with a professional on how it could impact upon you.
Real estate is another stream of income you could investigate. The main income stream here is rent. Obviously for this to be an effective income stream, if you are investing directly in real estate, it needs to be positively geared or positive cash flow. This means that you are actually making money from your real estate investment. If it is costing you every week, month and year through being negatively geared, it is not an investment, it is a liability and defeats the purpose of this exercise to create a stream of income.
As real estate is a fairly active investment, once again I would strongly recommend you do your research, learn a lot, read many books or websites and go to as many seminars as you can and get yourself a mentor (someone who has done what you want to do) wherever possible.
There are two main types of real estate classes, residential or commercial (which includes industrial and warehousing, car parks and storage), and you must decide which suits you better, depending on your plan. There are advantages and disadvantages with both of these.
Because it is an expensive exercise to get into real estate investing, you could look at joint ventures, partnerships or options, and each one requires careful investigation. You could even start this journey by investing in real estate investment trusts or property based shares as a passive form of investing in real estate, just to dip your toe in the water and generate income.
A more active form might be to go down the renovation path, by purchasing property at a discount which is in need of some TLC, doing it up to either sell at a profit or to keep for rental income.
There are of course tax implications for this as there is for everything else, so as usual do your homework and consult a knowledgeable professional and consider what ownership structure, if any, you should make be making for your purchases.
BUSINESS – UTILISING YOUR SPECIFIC KNOWLEDGE OR SKILL
Another stream of income is business. A business can be a very good way of generating an income stream, but it depends on the type of business you get into.
By business I’m not taking about buying yourself a job, working much longer hours, paying yourself last, if you get paid at all, and having all the responsibility of that business, while the possibility of bankruptcy hangs over your head. There are other ways of having a business.
The most obvious is turning a hobby into a part time business to begin with. Do you love to make things, such as jewellery? Are you crafty and like to knit or sew or scrapbook? Do you like to cook or bake? How about fishing or boating or camping? Anything that you are passionate about could possibly be turned into a business.
Firstly, there is making money from selling what you like to do, such as selling your jewellery or cushion covers or cakes. You could either sell through your own website or sites such as Etsy or local sites that specialise in hand crafted items. Or you could sell to retailers or someone who already has a shop front and can either sell your items on consignment or better still, prepay you for your items that they will on-sell, or you could sell directly yourself through local markets. You could organise tours or boot camps.
Or there might be a gap in your hobby that you could fill, for example a scrapbooking for grandparents book or instruction manual. Or you might see a need for a cookbook for people with coeliac disease, or exercising while pregnant. Do you love to garden and grow rare or exotic plants, that you could sell? The thing is there are always ideas out there. If you’ve ever thought to yourself “why is there no…” or “why hasn’t someone come up with …”, then there’s a gap in the market you could fill. Give some thought to what you love to do.
Another thing you might be able to do is leverage is your knowledge. Do you have a specialty, specific skill, expertise, knowledge or ability in your field? Could you write a book, ebook or contribute regular articles to newspapers or a magazine in your field? Could you write an online blog that could eventually sell advertising and have affiliate links to other paying sites? Do you love reading or are you good at spelling and grammar and could you freelance editing people’s manuscripts? Could you teach a class? Give some thought to what you know.
It doesn’t even have to be a hobby, something you love to do, or on which you have specific knowledge. It could be as simple as being able to source items at a good price, such as antiques or collectibles for example, that you know you could sell at a higher price. You could use tools and websites such as eBay to facilitate this. Could you import something that you know people in a niche market would buy, if you could provide it?
Once again, you need to set your imagination to work here, because once you do, you’ll see opportunities everywhere.
There are also significant tax advantages to having a business where your tax is usually payable after expenses, and not before as is usual with a PAYG job. In other words you claim your expenses against your income, and pay tax on what’s left. If you happen to make a loss (which is not the object of the exercise of creating passive income), you can carry this forward against the next financial year’s income. With a job, you pay your expenses with what’s left after the tax comes out. Of course, as with everything, seek professional advice on this.
Then of course you can look at more complex and specific things such as trading currencies in the foreign exchange markets. These are very specific and specialised areas and are not something to be entered into and taken lightly. Once again do your homework, read lots about it, attend seminars, seek mentors and make sure it not only fits in with your plan, but with your risk profile as well.
This is not an exhaustive list, rather it’s a forum to get you to start thinking about this, about how you can make this work for you, make you less reliant solely on your job for income, so that if the unexpected or unthinkable happens, you have other areas you can fall back onto.
Here are some articles that may help to get you started: