A frequently-cited IRS study on portfolios and income flows across wealth strata effectively formalized something we’ve long known: the rich are different from the rest of us.
It’s not that they work hard, shop electricity deals, or live frugally. Those things help and can certainly make a difference in our individual lives.
Rather, what differentiates millionaires from those who struggle to make ends meet is diversification. They manage a variety of income streams.
It’s no surprise that this practice builds wealth, but even if amassing a fortune isn’t your goal, it’s something you’d do well to emulate.
According to the research, millionaires rely on up to seven different income streams. Those include their paycheck, investment dividends, royalties, rents collected, business profits, capital gains, and interest earned.
None of these sources is guaranteed to bring in money. Job security may vary, especially if you operate at the C-level. Returns on investment, royalties, and property may fluctuate. Businesses can fail. Selling assets is a finite source of revenue while sitting and waiting on interest payments isn’t a recipe for stability.
But as you put those streams together, they create a form of synergy. Layer upon layer, they provide you with a measure of resilience and combine to form a solid financial foundation.
You don’t have to aim for seven income streams. The principle is what matters. Most people limit themselves to working with only one: their day job. As it goes, so make their fortunes. Don’t fall for the same mistake.
In the book Skin in the Game, Nassim Taleb makes a case for why more people should turn away from the traditional employment model.
Employees, he reasons, are trained to behave in specific ways, like housebroken dogs. They show up at the office on time, follow a standard daily routine, and essentially give up the freedom to do what sort of work they really want.
Modern employees are in perpetual submission to the idea of being employable. They dare not step out of line, speak any word, or commit any action that could tarnish their reputation in the eyes of current and future employers.
If you only have one reliable source of income, your paycheck, you’re bound by the same dynamic. You may not like the tasks your boss gives you, the work hours or the general rubbish you have to put up with. But you do it anyway because you’ve no other option.
Get an additional income stream, though, and the balance of power shifts. Your passive income might not be enough to replace the loss of a job, but it’s something you can fall back on should you decide to quit an insufferable workplace.
Building a career
Of course, not all jobs are a nightmare for employees. Those at the bottom of the hierarchy are typically worse than the ones higher up. Unfortunately, those positions also require specialized skills and are highly in demand.
It’s not a bad goal to remain employed if you can leverage your way into a job that maximizes your talents, aligns with your values, and offers purpose in work.
To get there, however, you need to build your career capital. This includes skills, connections, and credentials. But it also takes financial resources into account.
The logic is simple. Investing in yourself and orienting your career in the desired direction often requires accepting a pay cut to land a job that offers growth and networking opportunities. How do you get there without starving financially?
Accumulate and diversify your income streams. Long-term wealth may not be everybody’s goal. But aiming for financial stability and the freedom to pursue better, more meaningful work should be.