I have always had an entrepreneurial spirit. When I was young, I worked the playground economy and traded baseball cards and other trinkets, wrote papers and book reports, and found other creative ways to make a few bucks here and there to supplement my allowance. It was primarily fun for me then, and my money was just as quickly spent on baseball cards or something else I probably didn’t need.
As I’ve grown older, the desire to create things and earn more than my allowance (now a salary) never left. In fact, it has grown stronger. Most people in today’s workforce cannot rely on receiving a pension at age 55 or 60. If I am going to be able to retire at a young age I will need to contribute a lot of money to my retirement accounts. And I firmly believe that the more I contribute now, the less I need to contribute later.
One strategy I am using to contribute more money toward my retirement accounts is to create alternative income streams. My current goal is to become a millionaire, followed by my ultimate goal, which is financial freedom at a young age. I want to have the ability to do work I love because I want to, not because I need the money.
Defining Alternative Income Streams
When I talk about alternative income, I am talking about anything that I don’t earn through my day job. This could be money I earn from my home business, earned interest and dividends, monetary gifts, or money I get from bank bonuses, credit card bonuses, or other sources of free money. Other examples could include working a part time job, receiving rent from a property, royalties, etc. These are all forms of income I don’t rely on for my day to day living expenses, which gives me additional money every month to reach my financial goals.
Why Alternative Income Streams are Important
In many ways, alternative income is just as important as your regular paycheck. In some ways, it could be even more important if it is passive and requires no additional work to continue creating income. Here are a few more reasons why alternative income is important:
Diversification – Don’t Put All Your Eggs in One Basket
I am a firm believer that your ability to generate income is your greatest asset. You career is probably the largest contributor to your basket, should only be part of that equation. Cultivating multiple income streams can help you make it through a financial crisis or economic downturn. You should still build up an emergency fund, of course, but having multiple streams of income can help you survive a sudden decreases in income.
The image below is a prime example of diversifying your income. Ice cream doesn’t sell well in the winter in the northern parts of the US (I took this photo in Illinois). But Christmas trees do. This is a perfect example of using your resources wisely!
Multiple Streams of Income Gives You Options
Like investing a lot of money early in life, alternative streams of income give you options. When my wife and I became parents we decided she should be a stay at home mom. She left a higher paying job so we could enjoy a better quality of life. My wife and We are blessed to have this opportunity, but that also meant our income decreased after she resigned from her job. Going down to a one income family increased our risks – if I get laid off or something else happens, we could be in trouble.
At the time she was working long and irregular hours and it was difficult for us to spend time with each other. So we decided to cut back on our budget and begin saving money while working toward a transition when we would become a one household income. As part of that transition, I began a home business to increase our income. The additional income is irregular and may not replace 100% of her income when she stops working, but it will certainly make the transition easier.
That is why life insurance and long term disability insurance are so important. But that is also why I have worked so hard to improve my small business over the last 2 years. With my business, all my eggs are no longer in one basket.
Dying Pension Programs
Pensions have all but disappeared in the US. Gone are the days you could join a company after high school or college, work there for 30 years and get a gold watch, a pat on the back, and a paycheck for the rest of your life when you retire. Social Security is also in a perilous situation. Most people don’t have the comfort of knowing someone else will take care of them in retirement age. Alternative income streams help me contribute more money to my retirement accounts now so my retirement years will be easier.
Multiple Income Streams Help Reach Your Financial Goals More Quickly
Using alternative income is a great way to reach your financial goals – whether your goal is debt reduction, retirement, saving for a big ticket item, putting your children through college, or something else. An additional income stream means you can put your financial goal(s) into hyperdrive.
Alternative Income is a Form of Insurance
I’ve written about alternative income before, and why it is a large part of my long term financial plans. There are many benefits to having alternative income streams: income diversification, more financial options, accelerate debt repayment, save more money for retirement, work toward financial goals more quickly, and many more. There are very few guaranteed jobs out there. I think of alternative income as another form of insurance.
Recognizing the Need for Additional Income Streams
Take a few minutes to evaluate where your money comes from. Create a cash flow statement by listing your sources of household income. You should do this for your salary, investments, savings accounts, and anything else that provides income. Be sure to list all sources of income if you own a business or have a side project that earns you money.
Pay special attention to line items that make up a large portion of your overall income. Miranda Marquit, a freelance journalist and author, gave us the following quote:
Consider the number of clients you have, and how much of your income is attributable to to each. A few years ago, I had one client that accounted for half of my monthly income. This was a scary situation to be in, since my husband’s income was a small research assistantship as he attended school. If that client were to stop paying me, we’d be in trouble. I knew that I had to change the situation. I began looking for ways to change my client base, and make it a little more diverse. Now, my largest client accounts for 1/3 of my freelancing income. With my husband about to start teaching at university, that is something I can live with.
It’s not pleasant to think of what might happen if you lose your job. However, if you want to prepare for the future, you will need to consider the possibility. If too much of your household income comes from a single source, make a plan to cultivate other income streams so that you have somewhere to turn if you need to look for another day job.
Creating Supplemental Income Streams
You don’t have to try to replace your primary income entirely with alternative income if that’s not in your financial plan. However, you can reduce your exposure to the risk of financial devastation in the event that your primary source of income dries up. One of the ways you can do this is to look for alternative ways to make more money.
Alternative Income Can Work for Everyone
My friend Steve wrote about how to make money without a job and why you should. This is an excellent article that explores the merits of creating alternative income streams and why they are important. By the way, Steve was already earning six figures from his day job when he wrote this. Steve worked as a consultant, and recently, the company he was working for opted not to renew his contract. He is earning much less than he was as a consultant, but his alternative income streams helped bridge that gap.
How Do You Create Alternative Income Streams?
Steve lists several ideas one could use to create a source of alternative income, such as starting a blog, creating an online store, consulting, and more. But don’t limit yourself to his list, my list, or this list of more than 40 alternative income options. Use your skills and talents – whatever they may be.
The most common way to make more money is to have someone in your household get a part-time job. In a time of job loss, your partner’s part-time job may not be a replacement income, but it can help supplement unemployment benefits, as well as prevent you from decimating your emergency fund as quickly.
Other options for creating alternative revenue sources include starting a side business, doing odd jobs, monetizing a web site, freelancing, selling stuff online, income investing, and creating something that will earn you royalties. Developing these sources of income might take time, though, so it is important that you plan for that, and realize that it’s not going to be an instant income stream. However, as you build up your revenue streams, it will become easier, and you can work up to an increase of income that can be diverted to an emergency fund, or that you can use for other purposes. The important thing is that it can be there when you need.
It Doesn’t Take a Lot to Make a Difference
Think about how your life might change if you had an extra $100 per month. How about $500 or $1000? Even a little extra cash flow can help you with bills, living expenses, retirement savings, or give you date money. Any extra income that helps you meet your financial goals is a good thing. And once you get the ball rolling, you may find ways to increase your alternative income streams beyond your original goal.
Alternative Income Equals Freedom
I think everyone should strive for some form of alternative income stream – even if it is just earning interest from a CD Ladder or a high yield savings account. The key is to have your money working for you until you can reach the point when you are less reliant on a single source of income.
Ice Cream Shop Photo Credit: Ryan Guina