When it comes to the topic of diversification, many big time investors have opposing views, be it through their words or actions. If you ever know anything about investing and trading (which you probably should), diversification is one of the hottest debates we have ever come across.
Today, I’d like to talk more about how diversification has helped me to make money, both actively and passively, and how it can be beneficial to anyone who really wants to make money even when they’re sleeping. (Note: It’s not easy, but it can be done)
When should you diversify?
Essentially, diversification means splitting up your portfolio, hence your income as well as risk.
The one thing that you should diversify… is your income stream. It’s really a common sense to do so, but yet so few ever do. You don’t just spend on one thing in your life, so why do you want to earn your income from just one stream as well? Most self-made millionaires and billionaires derive their income and wealth from multiple streams from scratch, and slowly accumulate it over time.
Think financial security like sitting on a chair. Would you want to sit on a chair that has one or two legs only? I think you are going to spend a tremendous amount of effort trying to balance yourself on it without falling over! The least number of legs a stable chair should have is 3. The same goes for your income streams. Try to build at least another 1 or 2 income streams, so that when one of it collapses, you wouldn’t.
I have read about the theory of 7 income streams for millionaires, where there are 7 types of different incomes anyone can tap on to attain their wealth and financial security.
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1. Earned Income
This is the most basic of all, which everyone is trained to do. We work for people, and we get paid for doing so. This is what most people are complaining about, and I hope I can shed some light on how you can get your a** out of this.
The plain reason why most people can’t get out of this income stream is because its the easiest to be in and the hardest to get out. Not that you can’t quit your job, but its because its within our COMFORT ZONE. Not much effort and learning required to be able to work for others. You show up at work, and you make money. You stop doing that and so does your cash flow. How do you progress without getting out of your comfort zone? You can’t.
It’s like working out, I’m not the right person to talk about exercising as I hate to, but it’s something everyone can relate to. Every time you push yourself that bit harder, you gain strength that bit more. As long as you keep on pushing, you will eventually be able to get out of this “earned income” stream.
2. Profit Income
If you have ever sold anything at a price higher than what you bought, that is profit income. This is what businesses earn. They either build/create/import a product or service at a cost, say $10, and they sell to you at a retail price, say $100. They earn the difference between the retail price and cost price, which is $90.
As much as $90 sounds ridiculous to earn from something that costs just $10 to make, that’s the power of businesses, to be able to buy at wholesale prices, and sell to end consumers like us at retail prices. You will be shocked at the profit margins of some products you THOUGHT that was expensive to make. I wear a Kenneth Cole watch, retailing for $330. Based on my research and estimates, I don’t think it costs more than $20 to make one of those.
This is one of the income streams that make millionaires who they are. Anyone who has an entrepreneurial mindset should definitely dip their toes into this income stream. And yes, you don’t have to quit your day job for this. It’s all doable as long as you manage your time well!
3. Interest Income
If you have a bank account, you should know what this is. It’s just loaning money to an individual or a corporation, and they pay you for your capital. Nothing really fancy to talk about.
4. Dividend Income
Ah hah, this is another stream of income that people have been talking about. There is a blogger named Dividend Warrior, based in Singapore, whose investment strategy is based upon dividends. You can find out more about him here.
When you buy stocks in the market, you become a shareholder of the company. What this means is that you are now an owner of the company, and this gives you 2 benefits: voting rights and profits of the company. Voting rights give you the chance to take part in the management of the company during AGMs (or Annual General Meeting). You are able to exercise your votes for matters on the company resolution, that are to be voted by shareholders. Know more about it here.
The profits of the company are returned to the shareholders in the form of dividends. While some companies do not have a history of declaring dividends, others have a consistent history of dividend payment. It is not compulsory for companies to declare dividends, even if the business for the year is good.
5. Rental Income
If you have a rentable asset like a house, shop or a building, this is what you can earn from. This is one of the income streams which I have personal interest in.
Buy a property, rent it out and use the rental to finance your loan. You aim to use the rental income to cover the cost of the property. This would allow you to own a property without forking out much of your own capital, since it is paid for by your tenant! There are lots of materials on this topic, but one particular book which I enjoyed reading on real estate is Real Estate Riches by Dolf de Roos. Great book on how you can make money off real estate as it gives you insights on ways to make money off real estate you never thought of.
6. Capital Gains
To put it simply, its money you make by selling an asset you own. A house, a car, your stock holdings, etc. While I’d love to talk more about how to make money in stocks, I will cover this in another article itself. Too lengthy to be included in here, but you get the gist of what capital gains are.
7. Royalty Income
This is what book writers, song writers earn, or at least in the past. If you can create a software such as Windows and license it, every copy of the software you sell makes you money from royalty! This income stream, once perfected, makes you unlimited amount money. Ask Bill Gates, ask Steve Jobs. You can even buy royalties off RoyaltyExchange!
So yes, these are the 7 streams of income which I think people who wants to achieve financial security should look into. You don’t have to take a big leap, but take one step at a time. A journey of a million miles begin with a single step!