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
Monevator says
I’m definitely with you on alternate income streams my friend. Can I make one suggestion though? You say further on in your post that you plan to become a millionaire. While I understand goals are helpful, unless all your investments are in cash (and thus won’t fluctuate) the problem with a net worth goal is it depends on the whims of the market from day to day.
Imagine if you had been fully invested in the S&P this time last year. You might have been a millionaire then, but not now. Better to target something more stable, such as your total passive income, than capital values, I feel.
BloggingBanks says
I can’t agree more with you. I am creating CD ladders that would be good for up to 5 years which would still give me flexibility to adjust to changing interest rates and inflation.
As for online income, i would say it will be volatile since advertising is affected by the overall economy.
Donny Gamble says
Alternative streams of income should be apart of everyone retirement savings. Being diverse as possible will decrease the amount of money lost and also help you gain more money from your investments in the long term.
Jarhead says
Right now my “alternative income stream goal” is to become debt free with the exception of a mortgage. Once i am no longer paying CC interest that will be like getting a $500 a month raise. That is some decent alternative income.
Craig says
Allocating resources is a great idea and allocating income streams is just as smart. The problem is that is very difficult for most people especially since their main job takes up so much time. Any recommendations?
John Hunter says
Multiple streams of income are a great goal. I have been making progress in that direction for years (increasing my additional income).
Social security is actually in pretty decent shape. My guess is it will have to be adjusted but by and large should remain. My picks for adjustments are delaying the retirement age (at least 5 more years by 2050) and increasing the amount of income subject to the tax as well as reducing benefits for those with over $1 million in assets and $100,000 in income.
Ryan says
Monevator: I don’t think a net worth goal is the way to go either, but a lot of people put stock in a number (it’s an easy concept for a lot of people who are new to personal finance). Personally I’m going for exactly what you mentioned – the crossover point where my investments are earning me more money in passive income than my day job. That is when I will feel financially free.
Craig: Your question could easily be a series of articles by itself. In addition to the previously mention money making methods, working a part time job, receiving rent from a property, and royalties, one could start a business, do contract or consulting work, and many other side jobs. Creativity is the key.
Curious Cat: I’m working on alternative income streams as well. The more, the better as far as I’m concerned!
I think your ideas for Social Security are good, and we will probably see some of them in the near future. At this point I don’t plan on including SS income for retirement because I don’t know for certain it will be around. Hopefully I will be pleasantly surprised and it will be a nice bonus. 🙂
Jules @ Money Feuds says
Great, motivating article! My main job feels a little intense at times, so creating a second income source (other than interest on my investments) sometimes feels overwhelming in my “downtime”. But it is definitely something I need to work on. Or at least come up with a first step of developing an idea!
Ryan says
Jules: Trying to create new income streams can seem daunting at times, but there are many ways to do it. It can be as simple as consulting or working a part time gig, or earning money through your website. The best sources of side income come from things you enjoy – such as a hobby like the photos on your site.
Four Pillars says
I couldn’t agree more – I’m a single income household and being able to build up a small side income has really lowered my stress about being laid off. Even if the alternative income stream is a small portion of your regular paycheck – it will help a lot of the paycheck disappears.
Kristen says
I’ve had some sort of a second source of income for years. For awhile I worked a second job. Now I do some freelancing. Even as a working adult, there have been times where I’ve gone back to babysitting like I did when I was in high school and college. There have been times when the extra income was a necessity to live. But, even when it’s not needed, it’s still nice to know there’s a little extra coming in.
SaveBuyLive says
Alternative income is something that I wish I would have paid more attention to earlier in my life.
Not only is it insurance, but in the event that everything is fine and wonderful it’s extra dollars in your pocket that you can use to pay off debt, fund retirement, or even take a sweet vacation.
But the past is the past and generating alternative income is something I’m working on now. I’m pursuing several different projects and hopefully some will work out.
My goal is to eventually have enough income to cover my relatively modest monthly cost of living. Even if it only gets to 75% of my cost of living, that’s enough to cover me should my job evaporate.
Craig says
Its’ true, the little extra you make could pay for that vacation, or big screen TV, or just go straight into a retirement account. Something I am slowly trying to work on, not an easy thing to do though.
Ryan says
Craig: It’s not always easy, but it’s almost always worth it! 🙂
Blogging Banks says
I also try creating alternative income streams all the time. The one that has worked best for me for now is opening bank accounts for the bonuses, which could range anywhere from $25 to $200.
Other forms of income for me include interest income, although recent declines in CD rates have decreased my interest income 🙁
What are your sources of Alt Income CashMoneyLife other than this blog?
Ryan says
Blogging Banks: The lower interest rates are disappointing… I earn money from this website and several others that I run, signing up for bank bonuses like the $25 ING bank bonus, credit card bonuses, and other sources of free money. Here is an article I wrote about it last year: How I Earned $4,100 Without Working – The Beauty of Passive Income.
Independent Beginnings says
I absolutely agree that alternative income can be a great way to insure yourself. I have actually been quite interested in ways to make an alternative income online recently. I discovered ways to make money online such as viewing ads, reading emails, performing web searches, and more! Some are so easy and really quite fun. I am constantly on the lookout for more ways to make money online.
Ryan says
Independent Beginnings: It’s hard to stop looking for more ways to earn money once you get the bug! 😉
John Hunter says
I agree strongly with developing multiple sources of income. Rental property is another good source. Just like diversifying investment, diversifying income is good. It takes some real effort but the rewards and security are great.
Ryan says
Curious Cat Investing Blog: Agreed. I’d like to get a rental property, but with everything else I have going on right now, this is not the time!
Enrique S says
I like your analogy. I’ve started building up my alternative income streams, but still have a long way to go before i can consider them to be insurance.
Ryan says
Enrique: Even a little bit of additional income can help out. It helps pay bills earlier, boosts savings, or helps defray your expenses if you lose your main source of income. Good luck building your alternative income streams! 🙂
Kristy @ Master Your Card says
This is so true! I’ve always had some sort of alternative income coming in; however, I haven’t always managed it well. Historically, I’ve increased my standard of living. But, all that did was burn me out. I was working myself ragged just to survive. It was not about getting ahead, like it should have been. Recently I’ve been trying to simplify my life to the point where I can live quite comfortably on 50% of my salary. Once I get there, it will make my alternative income “extra” and I can really get that travel fund I’ve been going after this year funded. Baby steps. Still, I think alternative streams of income are helpful no matter what stage you’re in.
BM says
I also took up some consulting work outside of my regular job few months ago, partly in anticipation of my wife taking a longer maternity time off and uncertainties of my own job. Although it’s great to have an additional income, there is a price to pay for this. One of the first casualty was sleep, these days I sleep 2-3 hours less than my regular sleep and there is always bags around my eyes. Second causality is relationships, Besides the obvious effect on immediate relationships, I have not made any phone calls or emails to friends and family for quite a while, then physical health takes a beating, when I am under stress of a deadline, I end up eating junk/sweets early in the morning and skipping on my morning 30 min run. Finally it feels like life around me is slowly falling apart, so much so that I am considering not doing any more freelance work after this assignment is done. One thing I realized during the last couple of months is that one has to be a very organized personality to be able to pull this off, which I am clearly not.
Ryan says
BM: Great comment, and you’re 100% correct. Working extra hours can certainly take a toll on your health and relationships. I struggle with this sometimes with running my websites, and it can be a difficult balancing act. I have found it helps to cut back in some areas, and if that means no more working side jobs or taking on new projects, then so be it. My family and friends are more important than the money I earn running a side business or working after hours.
I’m glad you were able to realize what was happening in your life and put an end to the additional work before it caused too many problems.
DDFD at DivorcedDadFrugalDad says
I call this Defensive Entrepreneurship. Defensive Entrepreneurship is starting a business or businesses as a hedge against job loss or other financial setback.
These “spare time” ventures are usually conducted at night (“moonlighting”) or on weekends. They are sideline businesses that provide extra cash in good times that supplements your full time gig. However, they can provide stop gap help in tight spots in the event of a job loss. This happened to me a few years ago– I had a sideline business that I did full time as I looked for a new job after a layoff.
Best time to start– before you “REALLY” need it.
Ryan says
DDFD: I’ve never heard it called “Defensive Entrepreneurship” before, but I think that is a great term! Glad to hear it worked out well for you! 🙂
Regis says
Can’t stress enough how important it is to retain an alternate source of income. Now, more than ever, with the current financial crisis being experienced by thousands, and potential thousands from graduation from universities, one must consider the fact that our economic stability will never be the same. One must take steps to insure that they are able to maintain the quality of life they are used to and are not forced to live in financial distress.