One of the keys to achieving financial independence is building multiple streams of income.
People say this all the time, but I don’t think many make time to think beyond simply “multiple streams of income.”
How many streams of income do you really need?
What types do you need?
Multiple streams of $1/month incomes is not going to get you very far.
Statements like “build multiple streams of income,” lack clarity.
In my early days of thinking about this for myself, I figured I would buy a few rental properties, add those to my earned income, and that would make up my multiple streams.
Then I realized the path to buying a whole bunch more properties (we have 52 currently), and each one of those would become a stream of income so I’d have 50+ streams.
I know exactly how to buy long term rental properties using as little of my own money as I like. I also know how to make this fairly passive.
So hypothetically, I could scale this to as many income streams as I like, right?
While I was right that I could scale this to many income streams, and you can imagine the wealth potential there is significant, there is one big flaw with the model.
It severely lacks clarity and diversification.
To keep yourself purposeful, you need clarity on where you’re going.
Building multiple streams of income just to get rich, is not clear enough.
If thats your current thinking, then how will you ever know when you have enough?
I’ll be sharing my updated financial freedom tool with you in the next few weeks to help you get clarity on this for yourself.
It starts with knowing your household budget though. So if you haven’t got clarity on that yet, then start with that. Calculate your yearly household budget.
Next, lets discuss diversification…
Why is Diversification Important?
Real estate investors are as close minded as any group I’ve seen when it comes to asset diversification. And I know where they are coming from because I too was that person previously.
Avid real estate investors will often argue that diversification is not needed when you own multiple investment properties.
They’ll suggest that we’re talking about shelter which is one of our basic human needs. And demand for shelter is not going away anytime soon.
The close mindedness can grow even stronger when you’re talking with someone who owns properties in Canada where real estate is in extremely high demand.
It grows stronger again when they focus in areas I’m invested in like the GTA (Greater Toronto Area) where real estate is about as much of a sure thing as any asset in the world.
As great as real estate is, it has its downsides.
It’s not very liquid.
It’s not passive.
It is cyclical.
In places like the GTA it produces minimal or no positive cash flow.
And there’s constant tenant issues to deal with.
Like every other asset class out there, it’s not perfect.
And like we’ve seen in more volatile markets across the US, and more recently in the GTA and most of Canada, the values do in fact go down sometimes!
So diversifying is key to avoid any major disruptions to your life when markets shift.
You don’t get rich quick by diversifying, but you do sustain your wealth a heck of a lot easier.
There’s no point in being a millionaire for a day or even a year. You want to sustain and continually grow that wealth portfolio over time.
Diversification is essential for doing that.
There’s 2 common paths to being better diversified:
1. Diversify within your asset classes
2. Diversify the overall portfolio
Diversifying within your asset classes means that even within your real estate bucket, you need to strive for some diversification.
If you own 10 rental properties then it would be ideal to have them consist of a mix of property types, in different locations.
Diversifying your overall portfolio is more so the classic version of diversification.
Have assets in various asset classes, with varying risk levels, in different markets ideally all across the world.
You should always be striving for more diversification as you grow their portfolios. There’s really no end to this process, which is what will keep it interesting for the rest of your life.
Diversified Income Streams
Another way to view diversification is in the types of income streams you create for yourself.
This is something you can work on right in the beginning as you start to build out your investment portfolios.
One of the main reasons to invest is to produce multiple income streams for yourself.
Having a high salary alone will never make you wealthy. You will need to take some of that money off the table and put it to work for you.
You can’t just leave it in cash or it will lose money everyday due to inflation.
All wealthy people have become so through some form of investing.
The IRS (American version of the CRA) published results of a study in 2015 that showed how the uber wealthy attained and kept their fortunes.
The study was titled, “Over the Top: How Tax Returns Show that the Very Rich Are Different from You and Me.”
The study revealed the following 7 income streams to be most common amongst this group. Most had all 7 types.
Seven Types of Income Streams
1. Earned Income
2. Business Income
3. Dividend Income
4. Rental Income
5. Capital Gains
6. Interest Payments
7. Royalties & Selling Rights
You too will want to work towards having all 7 types of income streams in your income producing portfolio.
That is how you have very diversified income streams.
Here’s some ways you could accomplish this diversification…
Earned Income
This is income you earn through your job. It is usually paid through wages, salary or commissions.
While some North Americans have done well financially through this income stream alone, it takes an extremely high level of money discipline to do so.
You can’t just save your way to wealth. So you’ll need more than this stream that’s for sure.
Business Income
If you own a business of some sort then you can earn profits from that business and receive it as business income.
This is easier said than done of course as most small businesses do not make it past their first 2 years.
Prosperous economic cycles tend to create more entrepreneurs. Given the recessionary period we’re in now there will be less entrepreneurs out there and more opportunity for you to start something for yourself.
There’s more opportunity though because it’s a tougher environment remember. So you’ve really got to be committed in order to make income through this right now.
But you don’t need to build a multi million dollar business either.
Think big, but start small. And if it’s your first venture like this, focus on generating income as soon as possible.
Dividend Income
This is perhaps the best income stream of all.
Dividend stocks pay regular payments (dividends) to their shareholders without requiring them to sell their shares. Typically the dividend payments grow over time as the stock value increases.
Investing in dividend paying stocks is something you can do right now in any stock market.
Don’t expect to get rich overnight with this income stream. Most dividend stocks are considered to be fairly safe, boring and less volatile. Although this is definitely not a guarantee as they can come in all different forms.
Less volatile means less growth oriented. These are great long term.
Rental Income
When you buy investment properties they hopefully will produce income for you through rental income. Tenants will pay you monthly for occupying the space.
Simple as that, except of course for all the tenant stuff to deal with lol.
Hire property management. Doing that in house can make this income stream miserable.
We have a company for this btw and can help if you need it. Find out more here.
Capital Gains
Capital gains are triggered when you sell assets that have appreciated.
Buying a house for $500k and selling it later for $600k without spending $1 on any improvements will create a $100k capital gain for you.
A more liquid version of this would be stocks. You could buy a stock for $10 today and sell it for $20 tomorrow which would create a $10 capital gain in your pocket.
This is where stocks can have a leg up on real estate. Being able to generate that capital gain income on a very liquid asset at any moment creates great peace of mind.
With real estate you’ve typically got wait months to liquidate a property and access any of that gain.
Interest Payments
You loan money to someone in exchange for more money later. The reason you’re collecting more later is because you’re collecting interest on that money you lent.
The wealthy often do this by providing loans to businesses and other investors who are in growth mode with their businesses and assets.
Royalties & Selling Rights
Probably the most difficult stream to create, but often extremely lucrative.
Think of Donald Trump. He has a wide range of real estate assets with the Trump name on them. He does not actually own all of these assets though. Instead he is compensated very well for his name to be put on the building to make it more sellable.
We notice this stream generated most commonly amongst celebrities although you don’t have to be a celeb to crack this nut.
Many everyday people have come up with products and rights to patents that others are willing to pay for the rights to use.
You may know that Thomas Edison invented the lightbulb and patented it. The Wright brothers have a patent on airplanes.
There are millions of other patents out there though that are lesser known. For example Charles F. Brannock created and patented the Brannock Device. That would be the foot measuring device that you used to use as a kid at a shoe store. Remember that metal thing?
If diversifying seems too advanced for you right now thats ok. There is no finish line with it. You’ve got time.
But having an idea of your direction will help you set some goals around it.
Setting a goal of achieving these 7 different income streams in the next 10 years would be a great goal to have!
Then you may choose to start by adding 1 new stream in the next 12 months.
And if you’re just getting started on your investment journey, or not sure you have the money to start yet, then start with pre-investing. That strategy will help you build the savings needed to start investing more.
Until next Month! ✌🏻
– Sandy Mackay
P.S. The best way to give me feedback is on LinkedIn. Want me to write about something specific? Have suggestions? Send a message to me and use the hashtag #ThrivingMillionaires so I can find it.