Building, Diversifying, and Shifting Your Income Streams

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 differentiators are 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.” (source: Investopedia)
    • Portfolio Income is “income from investments, including dividends, interest, royalties and capital gains.” (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 investment 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 Lending Club.
    • 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:

About the Author

By , on Dec 5, 2007
Pinyo
Pinyo is the owner of Moolanomy Personal Finance. He is a licensed Realtor specializing in residential homes in the Northern Virginia area. Over the past 20 years, Pinyo have enjoyed a diverse career as an investor, entrepreneur, business executive, educator, and financial literacy author.

Leave Your Comment (31 Comments)

  1. Alan says:

    Robert Kyosaki writes about this in all of his books. For those of you who dont know who he is. google rich dad poor dad and read any of his books he has… well worth it.

  2. Chris says:

    Looks like I stumbled upon this article a couple years after its publishing, regardless, the breakdown of the different types of income is great. I’ve been building online businesses that supply me extremely passive income for years and thought I’d share a site I post on that has been generating me nearly $100 a month in passive income from my writing royalties.

    The site is http://www.infobarrel.com and the site is designed to help writers generate a long term passive income stream. Basically, writers can contribute guides and other informative articles designed to teach others what you know, and in return you earn 75% of the revenue generated by your content for the life time of your articles.

    So far its working out quite well for me. I try to write at least one article a day, and the income is really starting to build up.

    I hope somebody finds this information helpful!

  3. RG says:

    Great break down. This spectrum describes exactly what I am aiming for with my blog, job and other income-generating efforts.

  4. @Pinyo, thanks for sharing these tips. I’m at the point in my life where I am actively thinking about other forms of income.

    Keep up the great work :)

  5. Pinyo says:

    @Investor Trip — I like consulting too, but it doesn’t work too well with a full-time job :-P

    @Bill — Now he just have to create interest so that other people wants to buy his floor plan.

    @MoneyEnergy — Great point — it’s not about easy money. I should clarify that you have to put in some work to building these income streams (some more than others). I clarified this in the Extra Income Guide.

  6. MoneyEnergy says:

    One thing I’d add is to comment on the fact that although, if passive income is defined as what takes “less time and energy” to achieve, it seems like passive income is about “getting something for nothing,” we should remember another factor or two in the equation: value and the fact that you might already be using earned money to create that new passive income.

    Maybe it doesn’t take as much of your time or energy, but you may still be providing value that others need and will pay for. So passive income isn’t really “getting something for nothing” – an attitude that prevails elsewhere I’ve seen on the internet.

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