Money for Home Business: Creating Multiple Income Streams
One of the best ways to avoid the whole living in the gutter thing we talked about yesterday is to create multiple streams of income for your home business. This is a very trendy topic right now and I figured I’d clear a few things up.
In order to succeed using this model, there are two main steps involved.
Step One: Diversify your income streams.
When you are starting out, your diversification involves getting lots of clients. If you run a small business or you are a freelancer and the vast majority of your income comes from one company or individual, you do not have a client. You have a boss.
Lots of clients means lots of checks. If one client flakes out, you’re okay because you have other clients. You make your mortgage payment on time, your wife doesn’t leave you, and everybody’s happy. For now.
The reason this is only the first step towards income stream utopia is because this is not a sustainable business model for a company with only one or two employees. You work your ass off and you get paid. You keep working your ass off and you keep getting paid. At some point, you’re going to want to stop working your ass off. This is where step two comes in.
Step Two: Diversify your TYPES of income streams.
There are three main types of income streams. You want lots of income streams coming from as many of these as possible.
Active and Direct
This is the most common type of income. You do something for which you get paid. You take a freelancing gig for $1000. You perform the service and you are given $1000. Your income is directly related to your activity level. You don’t do it, you don’t get paid.
Active and Indirect
This is becoming a more and more common type of income. You write on your blog and get thousands of readers. Advertisers come beating down your door and offer you money to shill their stuff on your site. Your level of activity does not directly impact the amount of money you get - if you don’t blog today or tomorrow or the day after, there will probably be a negligible net impact on your income. It is still active, however, because eventually, a lack of activity on your part will impact your income.
The vast majority of unconventional income streams fall into this category.
Passive or Residual
Everybody loves the idea of passive or residual income. We all seem to have this image of laying on a beach in Bali, sipping a Mai Tai and having hula-clad groupies lovingly applying our sunscreen. The problem with this fantasy is that in the vast majority of cases, it’s crap.
There are very, very, VERY few income streams that are completely passive.
Patents provide residual income. Certain blue-chip stocks that pay dividends provide residual income. Books that are already wildly successful provide residual income. That’s about it.
Figuring out your income streams
To know what kind of income stream you have, figure out this little equation. It’s easy. Look at your activity (A) and your income (B).
If you take away A, what happens to B?
If you eliminate A and B disappears, your income stream is active and direct.
Example: You are working at a job. You quit. Your income goes away.
If you eliminate A and B diminishes over time, your income stream is active and indirect.
Example: You stop blogging. Gradually, readers start to leave and so do advertisers. Your income decreases gradually.
If you eliminate A and B keeps trucking along happily, your income stream is passive.
Example: You are Stephen King. You decide never to write again, and do not engage in any promotional activities. You have invested your money wisely. People keep buying your books and your stocks keep paying out. You never have to worry about money again.
That’s great. Why do you care?
When you know how much of your activity is directly impacting your income, you can decide where to assign your efforts. Like doing the job that’s closest to a bill, if you don’t have enough time or energy to get everything done, work on the activities that provide direct income. As you successfully create more indirect income streams, your level of activity can decrease without impacting your level of income, bringing you one step closer to Bali.
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At the moment, 85% of my income is Active and Direct. (my job)
Probably 13% is Active and Indirect.
Perhaps 2% is Passive.
I guess the key is to figure out how to change those percentages. I’d think the goal would be more like
35% Active and Direct
45% Active and Indirect
20% Passive (With much of this just being away and grown for the future)
As you point out, obviously we’d love that passive number to be much higher…but I’m trying to be a realist.
Hi Bruce… I think that’s a great goal. As nice as it is to dream about the Mai Tais in Bali, I think most of us would be bored. A decent chunk of passive income in tandem with a bigger chunk of active and indirect income is probably the best balance to strive for.
That, and like you say, it’s realistic. Sadly most of us just aren’t Stephen King yet. :)
Hello Naomi,
I would like to add one more income stream, which is risk taking. In the end, if we really want to make big, I mean, real big, we have to take a risk.
These days, there are many ways to bootstrap an idea in the cost effective manner to start up a scalable business. I can not comment on real estate, as I have absolutely no idea, but many people make it with real estate as well.
It will make the income stream balancing act more complex, and we do need to have a decent saving first, as not all risk taking will pay off. The return will be significant on the other hand.
Hi Asako - I like your point. Risk is very often directly proportional to reward - we’re actually going to talk about that today, when I’ve had some tea and can face Wordpress.
Real estate is a great example. In its most popular form, property flipping, there’s a substantial amount of both risk and work involved, but the returns can be amazing if you’ve got the stomach for it.
Awesome post Naomi. As you say, the completely passive income (or AIS - Automated Income Stream as the internet marketers like to call it) is very unlikely but IS possible. Using Google for traffic consistently, you can get a site to rank highly and benefit from affiliate sales/CPC.
I’m trying to get out of the active and indirect stream that blogging offers into this passive stream - but then again, I’m guessing that most people are after that too!
Hey Naomi. Great philosophy. I’m calling your cards. Let’s see your hand. What have you got in the irons?
Let’s see.
I got the business (active as all hell, though I did have this realization last week when surfing. My team is working right now, and I’m not. Thats a few hundred dollars I earned while surfing. Micro business wins one point. Of course it’s 1:42am and I just finishes working, minues 1/2 a point.)
I got the realestate. Rentals (one purchased and in good condition) are not quite active, but not quite passive yet. Periodically active. Like for the ambitiously lazy.
I put my wife to work, which for me, is passive income. Though she seems to think its completely the other way.
Got stocks and stuff. They do ok.
Some day I’ll monetize writing, but for some reason it leaves this ridiculous icky taste in my mouth to see ads all over a blog (I’m an idiot, I know). Perhaps through some other vehicle. Like blackmail letters. Still active though.
Definitly want to get into the speaking circuit. Found out you need to pay Al Gore 1/2 million to get him for an hour (one of my clients is trying to) and that was before the nobel prize. If thats not passive, what is?
Maybe I’ll put my dog out on the corner and have her turn tricks.
heh .. I’ve been thinking about this and am almost done writing a short rebuttle of sorts. Nah, wrong word. I can’t argue with you.
[...] planning to start one, or you’re related to me or my husband. Along the lines of the whole diversify your income thing we’ve been talking about, Maki from DoshDosh has a great post about making money [...]
@ Adnan - You’re right, it’s a popular goal. :) I think the danger (see: every damn post in the blogosphere right now) is relying too much on those streams. With the PageRank drama, and before that Alexa, and before that Technorati, it’s dangerous to get too reliant. In your case you’ve got BlogLOUDER and numerous blogs, so if one takes a hit, the world doesn’t come screeching to a halt.
@ Shane - Alright, Shane, bring it on. :) I’ve got the marketing thing, which is the main business. I do freelance writing. I’m an editor for a major corporate blog. Those are all active and direct.
The blog right now brings no money, since it’s only 3 weeks old. Hopefully I’ll get it to the point where it’s bringing in a bit, but that’s very low priority. There’s only room for one John Chow. I’m with you on the ugly blog thing. Not for me.
We have investments, fairly evenly split on the risk spectrum. The stuff in emerging markets and precious metals did well in the last year, but that’s probably going to start heading south.
Beyond that, not much. With my husband in school, he’s not a great source of passive income at this point. I mean, there was that series of bestselling books I wrote, but I don’t like to talk about those. :)
And re: speaking - brilliant. I can’t think of anything legal and accessible that has as much potential as that. Since both you and I are clearly as successful and intelligent as Al Gore, we should definitely start that soon.
Great post.
My income is currently ~35% Passive and 65% Active and Indirect.
Of course, that’ll change when I get another job, but hopefully I can grow the passive side so I don’t have to worry about work.
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