Financial security is always something that should be top of mind. Whether it be making sure there is enough money to cover an unexpected layoff or money for a medical emergency, financial security lies at the heart of handling money.
But what’s the best way to create financial security? Hoard all savings in a shoebox under a mattress or scrimp and save on every single thing purchased? While those are possible solutions, there’s actually a better way to reach financial security with multiple streams of income.
Your job equals one stream of income.
The idea of multiple streams of income comes down to making sure one is not solely dependent on a single income source as most people are. For most people, their 9 to 5 job is their only source of income. If something were to happen to their job like losing it as a result of a recession, downsizing, or a layoff they would immediately be in a state of insecurity.
Having additional income coming in, whether that be from a side business, rental property, or other places helps to eliminate one’s job as the end all be all for financial security.
Income From Investments
When it comes to selecting the next stream of income to add to one’s financial portfolio, emotional quivers are sometimes experienced when investments are considered. Investors usually think that they can take income off the top from stock growth or dividends. While this is sometimes true, there are two caveats that need to be considered with this approach.
First off, simply focusing on dividends can lead to a lack of diversification in investments. This is the risk caused if that one firm or one group of firms fail, then one has not only lost their savings but is also back at square one with one stream of income.
Secondly, if an investor is going to take income the proper way to live on from their investments via a diversified portfolio, it takes a long time to build. For example, an investor who would need a minimum of $40,000 a year to meet living expenses, would need roughly a $1 million portfolio of stock investments. The reason for this is that the stock market is not always going to produce a positive return. In order to account for volatility and protect one’s income, an investor should ideally limit their annual withdraws to no more than 4% of the value of their investments.
Picking Your Next Stream of Income
Saving enough to build a diversified stock portfolio large enough to retire safely on so you don’t have to worry or go back to work after retirement takes a long time. Consequently, for most people turning a hobby into a profitable side business, investing in other assets or investing in real estate can prove to be better ways to find financial security for additional streams of income. So take some time to evaluate your passions, strengths and weaknesses to see what might best serve you as your next source of income.