The Passive Income Challenge

Why it’s important to diversify Cash Flow Streams

When it comes to substantially improve one’s financial position in order to achieve Financial Independence over the medium term, it’s crucial to establish several income sources that generate cash flows where one has not to trade time against money and grow these streams so that one day, they match the household’s spendings.

Most people have their day jobs as primary or even sole source of income. That’s fine, that’s the basis. But don’t bank on that alone. A job can be easily be eliminated. No one can be sure of not being made redundant one day.

Many people have dividend-paying stocks in their portfolios. These provide an additional income stream, and what’s best: these don’t require active work. One does not have to trade time against money. Dividend income is 100 % passive income.

But also here, make sure not to only rely on dividend income. Payouts to shareholders can easily be cut by companies when times are tough.

Many investors have even huge book gains on their stock portfolio, which is a great wealth accumulator. But also here, don’t bank too much on that, markets can fluctuate heavily, and non-realized book gains are literally just a number that can evaporate easily.

Having built up an investment portfolio with rock-solid stocks and applying a long-term-oriented investment approach is a great way to build wealth over time, to become more diversified, more stable, and most important: a portion of the household income does not require active work.

But don’t stop here. Go further!

The COVID-19 pandemic with its huge health- social and economic challenges for the world has pretty made it clear, that we can neither rely solely on active work nor on just one or two passive income sources.

For instance, even dividends from great companies such as The Walt Disney Company or beer giant Heineken have been cut respectively eliminated completely.

The big lesson for all of us: there’s no single income source that is bulletproof. But we can (and should) diversify over the medium term (four to five years). It is possible to then have built five to ten different cash flow streams, which in sum will be strong enough to cover a substantial portion of our spendings, even when one or two income of them may face temporary challenges.

It is pretty obvious, that household’s cash flow streams can only be realistically and effectively diversified by adding passive income sources. After all, active income (work) is limited by the personal resources of each and every one of us. We cannot work an unlimited amount of time and we can certainly not take more than two or three jobs. The beauty of passive income is that it is scalable, that it can run on its own. The flip side is that it requires time, resources, know-how, and creativity to set it up. Passive income sources always are relatively tiny at the beginning, but through a continuous reinvestment process, they can become substantial. That stands at the core of the Compound Effect.

Various ways to establish Passive Income Streams

There are plenty of opportunities out there to earn money in addition to one’s day job such as freelancing etc. But let’s here just focus on sources that don’t require additional work and time again and again, which stands at the core of passive income.

Here are some of them:

  • Income from dividend paying stock holdings (such as Coca Cola, Procter & Gamble etc.)
  • Dividends from Exchange Traded Funds (ETFs)
  • Investing in Growth Stocks (e.g. High Tech) and selling at a gain (admittingly, realizing book gains is not a classic passive income per se, as it requires of course specific action(s))
  • Interests from corporate bonds, municipal bonds etc. (in my view no attractive option given chronically low interest rates)
  • Interest income from savings accounts (here again, not an attractive option)
  • Interest income from Peer to Peer (P2P) and Crowdlending Investments
  • Income from in Real Estate Investment Trusts (REITs)
  • Rental Income from Real Estate
  • Credit Card Reward Paybacks
  • Referral and Affiliate Income
  • Income from Digital Products
  • Solar Income
  • etc.

Just to be clear: there are many more. And no option or way is perfect per se. The best thing is to focus on a handful, to build the income stream up, to gain know-how in the process, and try to “automate” and chose a scalable approach. This takes time, usually several years.

So, let’s have a closer look at some of the various opportunities.

As said, interest income on a savings account or municipal or corporate bonds is rather not very attractive in a chronically low-interest environment. There are definitively better ways to put money to work.

The beauty of being a Dividend Growth Investor is the fact that you have a long-term relationship with fine businesses which tend to increase their payouts to shareholders over time. Companies like Nestlé, Johnson & Johnson, Coca-Cola, PepsiCo, etc. These businesses mint cash. It’s money flowing in without you having to Trade Time against Money.

The second aspect is the fact that Passive Income (in contrast to active income)is scalable and allows you to benefit from The Magic of The Compound Effect.

The third aspect is the fact that growing dividend income reduces the financial dependence of a job income over time.

But as said, don’t just stop there. For instance, one could also invest a smaller amount into Peer to Peer Lending (P2P) or Crowdlending to generate interest income.

Peer-to-peer lending which is abbreviated with P2P lending is the practice of lending money to individuals or businesses. It usually works through online services resp. platforms that match lenders with borrowers. With P2P, you as an investor, kind of become the Bank!

P2P companies resp. platforms (e.g. Mintos, Bondora) offering these services generally operate online and can run with a significantly lower cost basis and provide the service more cheaply than traditional banks. That cost advantage is one reason (of course not the only one) why through P2P interest returns (over 6 % annually) can be achieved

P2P lending can be an interesting passive income source addition but – like all investments – of course, it has its inherent risks. So it’s essential to focus on quality and to diversify. Own diligence is paramount as always.

Rental Income is another interesting form to establish cash flow streams. Why not buy a small apartment, put some work to make-over and then rent it out? Over time, more and more entities can be added. The beautiful thing about real estate investing is the possibility to leverage, with low interests mortgages this can be attractive. On the other hand, managing rental properties can be time-consuming, but this can of course be outsourced. It’s important here to be aware of all risk factors with this particular investment form and to organize things properly.

Now let’s have a look at the various opportunities where one does not necessarily let him/her money work. For instance, you could start your own Blog and over time monetize it, e.g. by establishing referral income and affiliate income sources.

Affiliate programs are created mainly to reward website owners, social media influencers, content creators, promoters, or anyone who has access to an audience interested in using a certain product or service.

There are plenty of Affiliate Programs out there. Just work on your niche, provide plenty of content with your platform or blog, and over time, you can generate nice cash flows by monetizing your traffic.

But there are more ways to generate nice passive income. One for instance is hugely interesting and very attractive: establishing a revenue stream by creating and selling digital products. Just think of that: a one-time effort to build something can be monetized over and over again.

So, you see, there are uncountable ways to diversify cash flow streams. In my view, it’s important to have at least some of them. As said, don’t rely solely on your job.

Take the challenge!

Diversify and get financially flexible.

Gradually, Overtime. And in the process, you can build plenty of know-how.

What about you, fellow reader, which passive income sources have been able to build up? Are there more you want to build, which are your favorite ones and why?

About Savy Fox

SavyFox is an investment blog that writes about various interesting investment topics and shares research and opinions with respect to Stocks, Peer 2 Peer Lending, or Crypto Currency investment opportunities.

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