Building, Diversifying, and Shifting Your Income Streams

December 5, 2007 by Pinyo.

I think many of us heard about income streams, active income, passive income, and portfolio income before (if not, I have brief description of each below). I’d like to share some quick observations about active versus passive income as it relates to financial independence and wealth.

Active and Passive Income

The image above is a simplification that shows active income on one end, and passive/portfolio income on another. The key differentiator is how much of your time and energy is required to generate the income:

active income generation requires a lot of your time and energy, whereas
passive/portfolio income generation can persist for days, months, or even years with very little effort.

Below the continuum are various income streams to help make the picture whole.

In my previous post, I defined financial independence as having enough income generated from passive sources to cover my family living expenses and a few luxuries. By inference, we can say that we should proactively do the following to achieve financial independence and build wealth:

Build the income potential of each stream, especially the passive ones
Diversify the numbers of alternate income streams
Shift income generation from active toward passive income streams

Regardless of success, it would be a mistake to focus on just one or two income streams, especially if they require you to trade your time for that money. Equally bad is growing too comfortable with just a few streams, such that it stops you from experimenting and diversifying. After all, something that works really well today could fail you tomorrow — e.g., losing your job, your profitable restaurant closed down due to infestation, your super stock pick went bust due to fraud, etc.

So the question is: Are you proactively building, diversifying, and shifting your income streams? If you are, or have a plan, I would love to hear about it.

Some Definitions

Income Types
- Active Income is “income for which services have been performed. This includes wages, tips, salaries, commissions and income from businesses in which there is material participation.” (source: Investopedia)
- Passive Income is “earnings an individual derives from a rental property, limited partnership or other enterprise in which he or she is not actively involved.”Â (source: Investopedia)
- Portfolio Income is “income from investments, including dividends, interest, royalties and capital gains.”Â (source: Investopedia)
Income Streams
- Job - Trading time for wage, tips, salary, or commissions by working for an employer. This is currently my primary source of income, but I am working on building, diversifying, and shifting.
- Consulting - Trading services for a fee, working for multiple customers. I had a short stint doing some web site design consulting work, but it didn’t work out well with a full-time job.
- Small Business ownership - A small business that you are heavily involved with, and it couldn’t operate independently without significant involvement from you. For example, this blog is a small business that I am growing.
- Managing Businesses - Partial or full ownership of businesses that can independently operate without your daily involvement — e.g., Warren Buffett and Berkshire Hathaway.
- Real Estate Investing - This ranges from you personally managing each property (more active) to owning a lot of properties managed by real estate management firms (more passive) — e.g., Donald Trump and his real estate empire.
- Investments - Examples include investing in stocks, bonds, ETFs, mutual funds, REITs, as well as lending via Prosper (Prosper currently has $25 sign-up bonus for new lenders)
- Royalties - One of my long-term goals: write a book and make money off royalties.
- Patents - I don’t think I’ll be inventing anything soon, but this is a multi-billion dollars industry.

More about income streams and passive income:

Alternative Income is a Virus @ Lazy Man and Money
My 2008 financial resolution @ Brip Blap
Everything You Ever Really Needed to Know About Personal Finance on the Back of Five Business Cards @ The Simple Dollar
How to Grow Your Net Worth When You Don’t Make a Lot of Money @ Free Money Finance
How Do You Plan To Get Ahead? Ways To Increase Your Income @ The Digerati Life

This post was featured in:

The Common Sense Wealth Carnival #3 hosted by TheLocoMono. For more information, please visit the Common Sense Wealth Carnival.

23 Comments

FinanceAndFat, 5. December 2007, 7:46

You broke that down really well. I’m stealing your graph! (for personal use only of course)

I think people often overlook the fact that very little income is truly passive- most anything you do will require at least a small amount of time for managing and reporting. Of course, piling on lots of those passive income streams that require only a small amount of time each can add up nicely.
Pinyo, 5. December 2007, 7:55

Thank you! I don’t mind if you want to use my graph on your blog, as long as you link to me and give me the credit for it.

Yeah, little things do add up. But I rather have 10 passive income streams generating same or more money as my job do and only spend 5% of the total effort.
Lauren, 5. December 2007, 12:02

Really shows how get rich quick just can’t work. Great job on the graph. Very nicely done.
glblguy, 5. December 2007, 12:39

I’ll all for passive income Great write-up. I’d say you are becoming pretty well known for your graphs!
Pinyo, 5. December 2007, 13:15

@Lauren - thank you!

@Glblguy - Hey, that’s a new income stream idea. I can create graphs for people…may be too much work. I’ll just let people download what they need and link to me instead.
glblguy, 5. December 2007, 14:18

LOL…yes, far to Active How about generating random graphs and making them available…that’s more passive
Mrs. Micah, 5. December 2007, 15:11

You’re right, Lauren. It definitely takes time and energy to set up passive income streams.
Steve, 5. December 2007, 19:04

Excellent breakdown. Do you really think “passive income” is a good term for that activity? I think it’s actually better to say alternative or nontraditional or something like that. Passive implies a lack of effort to me - and certainly the methods you flag as passive are not easy, effortless ways to generate income!

It’s interesting, too, that you use the word “shift”. I am trying in a tiny, tiny way to shift, but I suspect my move from active to passive will actually go in one big lurch when I quit my day job in a couple of years (and yes, I’m trying to be THAT confident about it)!

Great post, and I agree on the graph - pictures are worth a thousand words!
Minimum Wage, 5. December 2007, 19:10

I’d love to buy a rental property, where do I sign up?
Pinyo, 5. December 2007, 19:20

@Mrs. Micah - Yes, but once you have it set up, it can work pretty well without too much intervention.

@Steve - Good point. I think Lazy Man is a strong proponent of calling it alternative instead of passive, since it still requires some level of effort — i.e., not entirely effortless.

I think shifting is appropriate enough. If you regular contribute to your retirement funds, you are slowly shifting your income generation to passive income, usually as unrecognized gains. The final big shift comes when you quit your job and rely entirely on the retirement funds.

That scenario is typical for most people — i.e., work –> retirement investments. This graph shows that there are other things that we all can try to diversify and shift a little more.

@Minimum Wage - I am not expert on rental property, but I would like to recommend Two Wise Acres at http://www.twowiseacres.com/
glblguy, 5. December 2007, 19:37

@Minimum Wage - You should start a blog!
Minimum Wage, 5. December 2007, 22:12

That sounds SO appropriate. I was being at least half of a wiseacre (half serious, half wiseguy) when I wrote that. But it would be a vast improvement to get off the “wrong” side of a rental relationship and finally on the “right” side.
FMF, 6. December 2007, 5:35

Thanks for highlighting my post!
Pinyo, 6. December 2007, 7:43

@glblguy - I think MW would make a great blogger

@Minimum Wage - Ha, ha…I love that blog name too.

@FMF - any time!
Terry, 7. December 2007, 7:01

I think several other stream (tributaries) can come from investing in real estate in addition to just renting properties. For example, You can rent out rooms in your own house for an extra sources of income. Once you learn the skills of repairing fix-up houses, you can do handy man work as a separate job. People actually come up to you and ask you if you can repair things for them.

And, you can get in the business of buying a fixer-upper, living in it for 2 years while you repair it, then pay no federal tax when you sell (using the homeowners tax federal exemption). Then do the same thing over and over again with new houses. Some people have made careers out of buying and selling houses every two years, and never having to deal with tenants.
Mark @ TheLocoMono, 8. December 2007, 12:54

Pinyo, excellent graph work. I was browsing through my feed reader when your graph caught my eye and I literally slowed down to a halt to read it.

Patents are not necessarily 100 percent passive. My cousin had several patents but the company bought the rights to the patents so he did make money but it is not necessarily a lifetime income stream. I would like to read more about this somewhere.

Keep on rocking.
Pinyo, 8. December 2007, 21:26

@Terry - Thank you for your contribution. I should have called it “Real Estate Investing” instead of the more restrictive “Rental Properties”. Welcome to Moolanomy.

@Mark - Thank you. I am glad you like it. Thank you for the bit on patents. May be your cousin can write us a piece about patents?
fathersez, 8. December 2007, 22:37

You are so analytical.

Breaking down big issues into smaller ones, using your well thought out (clearly equally well appreciated) graphs.

I’ll be using your graph for my own use.
Many thanks
Pinyo, 9. December 2007, 8:58

@Fathersez - Thank you. I think I have 10 years of corporate training to thank for. Please feel free to use the graph — just don’t forget to link to me
Make Friends, Earn Money, 12. April 2008, 10:07

Pinyo, I think you make some excellent points about income streams. The diagram illustrates the key issues well. The priority is to yourself as a mini business and just like good business practice is not to place all of your energies into one channel, so it is with our personal finance.
cindy, 23. April 2008, 16:37

I don’t think that the royalties from writing a book will add up to much. I’ve been doing a little research about writing and the info I’ve found about making $$ by writing a book is not very encouraging. Of course writing a book isn’t just about making $$, it can be personally satisfiying as well.
Brip Blap, 23. April 2008, 18:06

@cindy: write an ebook and charge $.99 - you’ll get more than you would with a paperback. And I don’t think it’s personally satisfying to pour your heart and soul into a book and have no-one read it. You want to make enough money to encourage you to write the next one, don’t you?

Steve
Pinyo, 2. May 2008, 19:44

@Brip Blap - That sounds like a good plan. I wonder how much does a book have to sell for so that you’ll end up with $1 per book.