Great post. it reminds me of “The Cash Flow Quadrant”, Kiyosaki, and the forms of income diversification with emphasis being put on the “passive” income. I have had a side business of one form or another for almost 30 years and been fully self-employed for the last 11.
Income diversification is critical when self-employed but another critical piece of the puzzle, which you covered in a post last year, is living within your means which to me means “debt free.” If my SE income starts to crumble-which is doubtful right now since the majority of my income is residual and growing (But it can happen, I don’t live in a fantasy world) not having any “payments” (Credit card, car, house etc), I would not be devastated, but have time to regroup and replace that income.
Living Within Your Means
What does living below your means actually mean?. Not everyone will have the same definition, however I feel there are two requirements to living below your means, spending less than you make, and the second, being debt free.
Typically, someone will use debt because they can’t afford what they are purchasing. This may not be the case for some, but I’d call them the exception, not the rule. Being debt free is a massive step in the right direction when living below your means.
Debt Free is Good, Income Diversification is Great
As I said, being debt free is a great step, but notice that it isn’t the only step. There are plenty of people out there that have no debt, but they also have no savings nor any real assets. This person is just slightly better off than a person who is drowning in debt. This situation can easily go south and require debt.
This is why it’s important to have income diversification. Income diversification provides stability, period. More streams are better than fewer streams. Not to mention having complete control over one of them (owning your own business) affords you far more control over your financial path.
Savings are Important
Being debt free is a wonderful step, but without savings, and cutting spending, you’re only living at your means. If your situation deteriorates, you’ll turn to debt to “fix” your problems. Establish savings to avoid a financial Armageddon.
Be Optimistic, But Not Blind
It’s important to maintain optimism for sanity’s sake, but you can’t be blind to the possibilities. Are your income streams capable of being turned off? Freak accidents can happen, and you must have contingency plans set in place. Understand how vulnerable your income streams actually are.
SGGG, thank you for the well thought out comments that you continually provide, and I’m sure our readers will continue to learn volumes from the knowledge you freely share. Great work with your finances, and keep us posted on turning points!