Why is Income Diversity Important?

income diversity
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In today’s economy, it’s hard for a working individual to achieve financial freedom. But at the same time, it’s one of the most important things a professional needs. 

There needs to be a strong and stable bridge that gaps the distance between the uncertainty of financial inflow and a healthy income portfolio. 

Income diversity is important because it can help you achieve financial freedom. By having multiple sources of income, you can further your financial strength. Thanks to the financial stability a diversification of income can offer, you’ll have a better chance of surviving economic challenges.

In this article, we’ll elaborate on why income diversity is essential. Next, we’ll discuss the difference between active and passive income.

Lastly, we’ll go through some standard practices to diversify income.

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Why should you diversify your income?

The world economy is a perpetual circle of ups and downs. You can never be too sure about a particular financial decision or investment.

In simple words, you should always have income diversity. That means your primary source of income shouldn’t be the only source you rely on. 

You should diversify your income to achieve financial freedom and the ability to maintain your current living standard, even if returns from other sources stop flowing in.

It is crucial because global economic uncertainties can eliminate your primary and other sources of income without warning.

If you’re still asking yourself, “Should I start diversifying my income?” then the next section will explain why you should. You’ll also learn why you shouldn’t put all your eggs in one basket and what potential benefits could be yielded from such practices.

Achieving financial independence

Imagine a world where you have the perfect job, working 9 to 5 without worry. Suddenly, you get the news that your company is about to go through massive layoffs because it cannot keep up with expenses anymore, given the economic situation.

Such a scenario would set you back a few steps on the success ladder you worked hard to climb over the past years. Now imagine the same scenario, but this time around, you have established other sources of passive income that can help you sustain your lifestyle. 

It would also provide ample time to look for a new, active income source. 

What is active income?

Active income is any return you get from salaries, wages, or commissions. It typically involves working a full or part-time job and qualifies as your primary source of income.

You would fall in this category if you work for an organization and receive compensation for your services.  Most people today find themselves in their 9 to 5 routine and barely have time to consider income diversity.

If you fall into this group, I urge you to explore other passive sources of income. It wouldn’t only make you financially stable but will be your ray of sunshine through rainy days. 

What is passive income?

Passive income consists of any funds earned without being directly involved with business activity. These sources of income are essential to explore and usually involve the following types:

  • Dividends 
  • Interest 
  • Rental income
  • Royalties
  • Automated online business
  • Capital gains

The above is not the complete list of passive incomes, and there are additional methods a person can utilize to generate this type of income, such as real estate

The importance of income diversity applies here, too. If you only have one source of passive income, you’re still at risk of losing that source if things don’t work out the way you want them to. 

Continuous income flow

Unlike active income, certain passive incomes like royalties and returns from automated businesses continue to flow in even after you retire.

In a conventional job, you would typically get a substantial amount at the end of your career, after which the company stops paying you. On the contrary, you’d continue to earn royalties, dividends, and interests without doing much. 

Suppose you haven’t already invested in passive opportunities and have your money sitting safely in a savings account. In that case, you should educate yourself about the options available and safeguard your future.

Consider diversifying your portfolio if you’re already earning passive income. It’s an excellent practice to compensate for losses if some of your income sources don’t yield a favorable return.

Building your wealth

It’s no secret that building wealth is the ultimate goal. It doesn’t matter how much money you have in your savings account; what matters is the amount of wealth you own.

Wealth is any possession that yields a return and helps add to your assets.  Funds sitting in your savings account only yield an interest usually lower than the inflation rate.

Because of this, you actually end up losing the value of your principal amount over time. However, investing that money in passive opportunities helps you earn a more significant margin on your original investment. 

When you earn passive income, you can use the returns to invest toward building your wealth. Some people would invest in real estate, but if this isn’t for you, several options are available, as discussed above.

Utilizing these methods of income diversity will put you on the road to financial success.  We understand that making a financial change of this magnitude is always a scary thought.

Primarily when you’re set in your ways and have a steady amount of return coming in that serves your immediate needs. However, change is inevitable; it is the only constant thing in the world.

If you don’t change your ways, things around you might change, leaving you vulnerable to a financial crisis.  You shouldn’t consider income diversity a significant change in your financial situation, but take it as a challenge.

A challenge that will provide you with financial security and stability. 

Conclusion

It’s always the first step that’s hardest to take. Once you start diversifying your income sources, you’ll soon notice that it becomes second nature and requires less time, time that you can spend with your friends and family and enjoy life.

With that, we wish you the best of luck with your investments. 

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