Are You Diversifying Your Income? You'd Better Start.
This story appears in the March 2016 issue of Entrepreneur. Subscribe »
Everyone can agree: A business should never rely on just one customer to generate the majority of its revenue. When that client moves on -- poof! -- there goes the business. But you need to apply that thinking to the bigger picture, too. Are you relying upon your business to generate all your personal income? That’s a problem.
Don’t think of it as a knock against your ability as a business owner or your company. All you’re doing is hedging, and that’s smart. For example, one of my clients is a lawyer. She does well, but her business, like any business, has ups and downs. So she also bought the building that houses a Wendy’s franchise in Michigan, which provides her a 7 percent annual return on a lease that runs in five-to-seven-year increments. (I own rental properties, too. And as I wind down my business -- which, hey, isn’t happening yet! -- that cash will fund a sizable chunk of my retirement income.)
So how much of your income should be diversified? The answer depends on your circumstances, tax situation and goals. Make a plan with your financial adviser. Here’s mine right now: I’m 45, with a decent amount of investable assets, so only 20 percent of my income is passive. Barring some unforeseen financial emergency, all that money is strategically reinvested.
Now here’s where it gets interesting: Once you begin generating passive income, you can invest it in ways that build more wealth and eventually create, yup, more passive income. Let’s say you net $2,000 of income each month from a piece of rental property. Reinvest that income, like my lawyer client did, and it could earn 7 percent annually. After 10 years, you’ve got $334,000. Even $500 of additional income each month could turn into almost $100,000 in 10 years, depending on how you invest it.
There are many ways to save and reinvest, but the process all begins the same way: As soon as your business kicks off enough income for you to start using that money judiciously, open your eyes to new income opportunities. You worked hard for that money—and that money should be given the opportunity to work just as hard for you.
