What is it’s meaning and How it works ?
Basically when you have income coming from more than one or two source, on which you primarily depends for your survival in the world of expenses, then we can say that you have multiple sources of income.
It works in a very simple way. You create some sources which pays you some amount of money time to time, this period of time can be fixed or flexible.
For example If you have a property which you aren’t using, you can rent it out it, This will pay you a fixed amount of money, which can be monthly or annually.
How many types are there ?
Mainly there are two types Active Income and Passive Income.
Active Income – Active Income is that income which you earns by working actively. All types jobs and self employment activities which gives a fixed or flexible income, comes to this category.
YOU WORKS YOU EARNS, The moment you stops working your income stops coming.
This type of income has a limit, or you can say it has a time constraint, because you and everyone else has only 24 hours a day and there is limit to the things you or anyone can do in this limited time. You can earn only a certain amount of money, even by increasing your hourly charges (Fee).
IF YOU ARE BEING PAID BY HOUR, YOU WON’T BE RICH EVER.
Passive Income – Passive Income is that type of income which you earns even when you aren’t working, this type of income is not directly related to your working or your time, to earn it.
This type of income can further be divided into
Royalty – It the income you earns when you let some use your patents, copyrights, trademarks, in exchange for a fixed or flexible amount of money or a percentage of their profits who are using your intellectual property.
Rental – It is that income you earns from renting out the products or properties you have extra and you particularly don’t uses.
Interest – It is that income you earns on your money when you puts it into a bank account or gives to other needy person who will give some money for using your money like peer to peer lending.
Capital Appreciation – When your invested capital or money is appreciates, this is called Capital Appreciation. For example you brought a property at a price of £100,000 five years ago, which is now worth £150,000, in this case your capital appreciation is £50,000.
Dividend Income – It is the income which you earns by investing in Stocks.
Why we should have Multiple Sources of Income ?
Here is a Quote from Warren Buffet –
NEVER DEPEND ON A SINGLE INCOME, MAKE INVESTMENT TO CREATE A SECOND SOURCE.
Now the question arises Why should we have multiple source of income, Isn’t the answer obvious, More income sources, more the the money coming in, Isn’t this what we all want.
But there is a important reason why you should have multiple sources of income, and that is YOUR FINANCIAL SECURITY.
When you depends only on one source of income and if it stops, your life will be in jeopardy, because you still have to pay for the day to day expenses, And if this situation continues for long all the aspects of your life will be affected by this, so you should have at least three sources of income to be better financially.
How to create Multiple Sources of Income ?
Before we try to create new income sources, we should understand our financial position, how good we are doing financially, is there any changes we need to make to improve our income from our current income source, If answer is Yes then do this first, when you have done it you will have more income than before,
Now comes the second part of it where you need to be accountable for your expences, cut down your expenses which are not giving you a net positive result.
After doing these two steps you will have a good amount of money to create a new Income Source.
Put this money in a fixed deposit for now until you have a better plan to invest to somewhere else where it will earn you more money. And one more thing YOU HAVE JUST CREATED AN INTEREST INCOME SOURCE. Which will give you more interest than your savings account.
Now comes the Education part, before you invest your precious money, invest your precious time to learn about it (investing or creating sources of income), like investing in properties, stocks etc.
FIRST YOU LEARN, THEN YOU REMOVE THE ‘L’.
Here is how we can create Other Sources of Income
Royalty – Everyone has a talent, which they don’t know what it is in the most cases, and for those who don’t have any talent, there is a good news IT IS SOMETHING WHICH CAN LEARNED OR ACHIEVED BY CONTINUOUS EFFORTS.
You can write book or create courses or create a product or an service which doesn’t necessarily requires your presence, these all are the things which can done by anyone WITH EFFORTS.
IF YOU WANT SOMETHING YOU HAVE TO WORK FOR IT.
For example – You have talent or you knows how to write a book, then write it and publish it yourself, when your book becomes known, if it has real value, then publishers will come to you to further publish your book and will offer you a percentage of their profits. Congratulations you have just created a ROYALTY INCOME SOURCE.
You learn about rental properties and by them when you have enough money, and this will be your RENTAL INCOME SOURCE.
These three sources are easy to understand and create it will take time, money and efforts, but the returns will be far more valuable than anything else. So focus on these above three sources of income.
And for those what’s some extra sources of income, here they are…
Capital Appreciation – This mainly concerns Property & Stocks. You buy these and wait for them to grow in value. We discussed capital appreciation above.
Dividend Income – Even buys shares of a company, you becomes a shareholder of that company, when company pays dividends to its shareholders you earns money on your investment on shares. This is not a very good income source, because not all companies pays dividends and companies are not obligated to give dividends to its shareholders. You may or may not receive dividends, But you may receive CAPITAL Appreciation.
Aim Institute of Economics 