The majority of working people rely on a single source of income: their full-time job. We use this income to live comfortably in the present while saving for retirement and our children’s education in the future….assuming you are saving money. It’s easy to fall into the habit of relying on your job for everything, but what if you lose your job, your only source of income?
Why You Need To Diversify Your Income?
Diversifying your income via new income streams is just as important as saving for retirement and for emergencies. When you lose one income stream, you still have one or two, or even more left to help you until you are able to recover the lost income stream.
Many individuals choose to diversify their portfolios, spreading their money between different asset classes, such as stocks, bonds, real estate, cash, and commodities, among others. While this strategy has its merits, there are other reasons for pursuing diversification beyond simply increasing portfolio returns or reducing risk.
However, I believe that creating additional income streams is only Step 1. For me, Step 2 is diversifying each individual stream. I will explain more about this and what I have done throughout this post and a follow up.
Step 1 – How To Diversify Your Income Stream
For over a decade throughout high school and University, I had a single income stream – my part time job and various internships/co-op placements. I didn’t know much about personal finance other than “spend less than you earn” and “pay yourself first”. I had no idea I could make money on the side and how to use my money wisely. At the time, I was focused solely on making enough money to pay for school and be careful not to borrow too much.
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Once I graduated and got a full time job, I focused on paying off debt. I was able to do it in just over a year…$20k paid off in just over 13 months. Once I had done that, I focused on building up an emergency fund in my savings account. I was putting aside around 30% of my net income and I was happy (not like now with my inflated lifestyle that I am trying to take control of).
After I had built up around 4 months of living expenses, I noticed that I was earning a small chunk of change through interest. This is when I started to wonder about the possibility of earning even higher interest. Through some research I came across my first true passive income stream – dividends.
But before I get into dividends, I want to share my first diversification step using interest from my savings account:
When you buy stocks on the market, you buy a piece (a very tiny piece) of a company. You become a shareholder in that company. Each time there is a surplus of capital, the company will reinvest some of that money back into the company to further improve the business, and also distribute a small chunk of that surplus to the shareholders. That, in a nutshell is how dividends work. Please note, that not all companies pay out dividends. Some may elect to reinvest all their surplus money into the business.
At first I got into dividend investing through my main bank – RBC. I opened an RRSP through them and bought a couple of mutual funds with high MERs (I had no idea how to judge the MERs back then) which offered a mix of banks, utilities and consumer goods. I set up an automated transfer to buy a few more shares each paycheque of each of the mutual funds and left that on autopilot for years.
I should note that my salary at this point had gone up which increased its contribution to my income streams. At this stage, I had a little less invested in mutual funds than I had in a high yield savings account (my emergency fund), yet I was making slightly more in dividends. I was hooked.
During the first year of dividend investing, I started to read about personal finance and some basic investment. I learned about management fees and started to work on reducing them. I opened a Questrade account and transferred by RBC RRSP. With the money I bought a few ETFs with similar compositions, but much lower MERs and a bunch of REITs.
Small bump thanks to lower MERs and increased savings and investments.
Dividends were slow but were building up. During this year, I had gotten a couple of promotions and raises, which increased my overall overall income. Had I not gotten those raises, my income stream mix would have looked more like:
Around this time I had started to read financial blogs, which then lead me to discover that some people were making some pretty decent money on the side through their websites in the personal finance world or other unrelated topics that they maintain.
Wait, I have a hobby site which gets a few thousand hits per day. Maybe I should monetize it. So I did. I added a Google AdSense banner and waited. The first month I made $30, then $65 the second, then $112 the third, then $220 the fourth and so on. Once I saw the potential, I started to work very hard on the website and kept adding a ton of new content each week. I also started connecting with fellow contributors in the field. Within a year after I started to monetize and work on my website.
A few months I even made more money through my website than my full time job. However, I was spending 20-30 hours on average on my site each week and by the end of the second year I was burnt out. Google had also changed their search criteria multiple times and I could no longer keep up with optimizing the site, working full time, adding new content and having a life so I throttled back and my website became a passive income stream. Not too bad. Over 11% of my net income is passive.
Throughout this time I kept investing a little at a time to boost my dividends. I also got a couple of more pay raises which made my salary account for a larger percentage. I was also able to diversify my full time job income stream.
Step 2 – How To Diversify Your Income Stream
In this section, I will explain how I started to look at each individual stream and how I tried to diversify it for even further overall diversification.
When you first start investing, one of the first things you learn about is investment diversification. Diversification is vital because if one field performs poorly, another field will carry your portfolio, reducing the chance of a large loss. I decided to investigate if the same method could be used to each of my income streams in order to diversify not only my overall income stream, but also each individual stream.
Full Time Job
This section may not be applicable to most people and most jobs, but as I climbed the corporate ladder, I discovered all the benefits of working hard and started to learn about all the way I could get more money out of my job. I started off with something very simple and easily accessible to all employees – RRSP matching.
One of the first things I learned about after my trial period was the company’s RRSP matching. If I were to contribute a percentage of my salary to a Group RRSP, the company would match my contribution up to 3.5% of my salary.
When the company matches your contribution, the matched amount gets added to your reported income. Also, if you are wondering why the pie chart only shows that 3.4% comes from RRSP matching, remember that the 3.5% is added on top of the salary, which changes the denominator in the equation from 1 to 1.035.
I joined the company halfway in the fiscal year so I was told that I wouldn’t be eligible for any performance bonuses. However, I did inquire about this and what it would take to qualify for the program the following fiscal year.
The requirement was simple – I had to work an average of 44 hours per week for the fiscal year to qualify. That means that I could be working 44 hours each week, or I could work 48 hours one week and 40 hours the next week. At first it was challenging, but as I took on more work, it became easy. Some years I even averaged close to 50 hours per week for the entire year.
At the end of the year, your bonus was just the total number of hours you worked over the required amount. For me at first it was anything over 2,000 hours (40 hours per week, 50 work weeks per year and 2 weeks vacation). Later on that became 1,960 hours (40 hours per week, 49 work weeks per year and 3 weeks vacation). This started to add another 10% to 15% on top of my base salary.
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Becoming a Shareholder
As I took on more work and responsibilities, I started to move up the ladder and at one point I was casually asked at a work party if I were interested in becoming a shareholder? I said that I was interested, but I wasn’t sure if I could afford it.
About half a year later, and a lot of hard work later, I got a formal, non-binding offer from the executives with a range of sums I could invest. Once I accepted, I was given the financials of the company and a binding offer if I were satisfied with the financials.
One of the original shareholders sold his share and there was enough money in the company to allow new shareholders without capital to be given an interest-free loan for up to 5 years. This is the option I went for because…interest free!!!! Also the offer came in at the worst-possible time when I bought a home and spent a lot of money on renovations, appliances and furniture.
I recently learned about another income stream option available to selected senior staff – profit sharing. I am currently working towards going up the ranks to get to the point where I can be considered for profit sharing as well. Profit sharing is done each quarter after shareholders are paid their share so I will have the opportunity to double-dip into the profits.
I am not sure what the true financials are behind the profit sharing program, but from what I have heard it is not too great at first, but you steadily see an increase of your percentage of profit sharing over the years. I heard that some of the more senior staff, who have been taking advantage of this for over 10 years are making almost as much as their base salary from profits.
This is where I am still lacking a lot of knowledge, but trying to learn something new every day. Before I sold my investments for a downpayment for the condo, I had 7 dividend paying stocks/ETFs I was invested in, in addition to a few other non-dividend paying stocks. One was an REIT, one was an income fund and the others were a mix of ETFs. The REIT and the income fund boosted my monthly dividend payments quite nicely and at their peak, I was earning close to $100 per month from them, which I thought was a decent start after a year and a half of investing in dividend stocks.
I don’t remember the exact mix at the time, so I cannot provide a pie chart, but I can provide one of my current portfolio that I am trying to rebuild. Yes, I know it could be better, but it will improve with time.
I have only done a bit of diversification with my website in terms of income streams. I was, and still am, largely dependent on AdSense for my income. Earlier this year a couple of friends agreed to help me completely overhaul the website and come up with different revenue strategies for the first time in 6 years. But since we are all busy with work, the expected timeframe for all changes is expected to be 2020.
By then, we hope to have several additional income streams, including ebooks and print-on-demand material. Can’t wait. It will be expensive since I will need to hire a database developer as the website is 90% database driven and I am at my knowledge limit, but I think it will be worth it.
Back to diversifying my website income. In addition to AdSense, I hired a couple of local guys to put together very quickly a plain and cheap mobile app of my database site. The app is free, but it is ad-supported with AdMob. The revenues fluctuate a lot, but it did help me boost my income slightly and does account now for around 15% of website revenues.