We have all heard about diversification when it comes to our investments. Most people tend to believe that putting all your eggs in one basket is a highly risky approach to doing things.
This could apply on several levels. First, in terms of diversification among asset classes. For most of us, it’s probably not the best idea to be investing 100% in stocks – or bonds, or any other asset class. Even if you did diversify well, you probably wouldn’t want to put all your money in one particular investment in an asset class. For example, within stocks, you wouldn’t want to put all your money into one particular stock – diversification within asset classes is important too.
All this being said, I think we can agree that for the average person, investments ought to be effectively diversified. But what about income?
There is regular chatter among many personal finance bloggers about the value of diversifying income streams. But I wonder this: among most mainstream (non-PF Blogger) folks, why is diversification of income not seen as being as critical as diversification of investments?
Think about it – most people will not put all of their investments into one particular company. Sure, there are some who don’t believe in the concept of diversfication vs. investing in what you know, but that’s not super common. By default, if people have a 401k, they’re probably invested in many different companies by virtue of having mutual funds. Or, if they own a home, they might have some equity in place. Perhaps they have bonds, or cash. Either way, it’s highly unlikely that their investments are tied up into one single company.
However, when it comes to income, many people seem to view it differently. Frankly, I used to be the same exactly way until the last year or so. This meant looking at a job as THE source of income. Without a job, there’s no income.
Realistically, that’s probably the case with most people, I’d assume. It’s the way our society seems to be set up. However, this mindset seems to lag the sophistication we collectively have about diversification of investments. Shouldn’t income be diversified too?
If the primary source of people’s day to day money needs is their income – while savings are for retirement and other longer term needs – then it seems to make sense that income should be protected. This can happen by having a great career, but even then – you could be at the mercy of your employer, your industry, or economic conditions. So, why not diversify income sources?
Again, while many personal finance bloggers think about this, I wonder why this concept of income stream diversification isn’t has seemingly top of mind as investment diversification?
Recommendation: let’s consider it to be essential to have multiple sources of income.
If we wouldn’t invest all our savings in one company, why invest all of our income potential in one company? Let’s really take action and work on multiple streams of income in the New Year!
My Questions for You:
Why do you think it is that many people might be hesitant to invest all their money in a particular company, but will totally depend on an income stream coming from one company in employment?
Are you taking action on generating an income stream that’s different from your day job?