🌼How (And Why) I Built 4 Streams Of Income(AMAZING WISDOM)
What mainstream financial advice won’t teach you about financial security
slow motion capture of a waterfall and a stream with rocks
Like most people, when I started my adult life, I had no concept of what it took to be financially secure. I assumed that having a good job and socking away money in my 401k was all I needed to be safe. I planned to keep my head down and work hard to ensure that I was valuable to my company and hope for the best.
Then the layoffs came.
What a stressful time. To not know if you will have a job, a salary or medical insurance for your family is tough.
I was fortunate enough to stay employed, but watching my friends and colleagues lose their jobs was painful. It made me start to think about what I would do if I were to lose my job. I had already started reading some about investing and had two rental houses (places where I previously lived and kept when moving out), but I didn’t have enough to fall back and would be quickly looking for another job.
Of course, looking for a job when your industry or the economy is weak is not easy. Most companies will be laying off people, not hiring them. It can take time to find a new position.
How do you survive in the meantime?
Growing up, I believed the standard financial advice that getting a good job at a good company will provide a safe and secure career. Unfortunately, this thinking was more appropriate in the 1950s than in today’s world. Long gone are the days where the majority of professionals spend 40 years at one company and retire with a nice pension. Today, the average American worker holds 12 jobs in their lifetime according to this article from the balance.
Contrary to what I believed growing up and what you will hear from mainstream financial advice, having a job does not provide much income security. Especially in countries like the US where workers can be laid off at any time and for any reason, usually with only two weeks’ notice. Severance packages are not required. This is a lesson that too many learn by experience during recessions or industry downturns, such as last year’s Covid lockdown.
As much as we hope this type of event will never happen to us, it still pays to be ready.
I will repeat it here because it cannot be said enough. Relying on only your salary and your 401k will not allow you to be financially secure, much less financially free.
So what can we do?
bronze statues of mean waiting in a bread line during the great depression
Image by PublicDomainPictures from Pixabay
What I’ve done instead
Rather than only relying on my employer to feed my family for the rest of my working life and beyond, I have spent the time and energy to build up additional income and wealth streams that can help to support us if I do lose my job.
It hasn’t been easy, but I believe it is better to be prepared than to be hungry if I do get laid off.
Everyone has to find what works for them, so your path may look different from mine, but the four streams of income I’ve been working on are:
Having a job is a good thing, in general. It doesn’t make sense for most people to dump their day job without first building up alternative streams of income. You can use the regular paycheck to feed you and your family while you work on other projects and use the income to provide cash for you to invest.
So although I don’t believe that moving up the corporate ladder is the best way to build wealth, keeping your day job until you are ready to leave it on your terms certainly is important.
I no longer put in a lot of extra hours on nights and weekends trying to get promoted, but I do still work hard to ensure that I’m well-positioned to keep my job when times get tough.
My job is still my primary source of income and must be protected as such until I’m ready/able to walk away. I spend less than I earn and invest the rest in my quest to increase my other income streams.
After my day job, my next largest source of wealth is real estate. Over the past decade, I’ve built up a portfolio of seven rental houses and one commercial property. To get the funds for these houses, I saved money from my salary in low-cost index funds outside of my 401k.
While the single-family rentals don’t provide enough cash flow to live on, they do help to build equity at high rates of return through leveraged appreciation. I plan to hold the houses for another +/- 5 years, then start to sell them to reinvest the equity into other assets that provide more cash flow, such as commercial real estate.
illustration of a housing development
Image by Free-Photos from Pixabay
The one commercial building that I own (with a partner) produces much more cash flow than the rental houses. But it was much more complicated and expensive to buy, so it takes some knowledge and some wealth to get started. Another great way to invest in commercial real estate is to join a group as a passive investor. I look to do more of this in the future.
For comparison, single-family houses may yield around 2% cash on investment ($1 million invested produces $20,00 per year), whereas commercial real estate can return 7% or more ($1 million invested produces $70,000 per year).
As you can see, building up equity with single-family houses and then converting that equity into commercial real estate is a great way to generate income outside of your day job.
Conventional financial advice suggests that you save as much as you can in your 401k (or similar) plan in low-cost index funds. This advice is solid, but it isn’t enough. It is not easy to use those funds before you reach retirement age, and low-cost index funds do not provide significant income (current S&P 500 dividend yield is 1.53%, meaning $1 million invested provides only $15,300 per year in income).
So while index-funds are a great way to build up a pile of cash, that cash will need to be converted to another asset that produces cash flow to be useful for financial security.
To generate income, I started a different approach last year with my extra time in lockdown. After several years of study and practice on paper, I started selling options in a brokerage account to both generate income and to buy good value stocks (often with good dividends) at good prices. The income generated varies, but I can often generate a few thousand dollars in monthly income using these investment strategies.
Although I’ve only been doing this for just over a year, if I can continue to be successful, then this strategy will compete with and often beat commercial real estate in terms of cash returns. That means that when I start selling my houses in a few years, I will see which strategy has been more successful and fund that one to generate even more cash flow.
While I’ve had some success with real estate and the stock market to build wealth and generate income, one area that I’ve struggled with is starting a side business. A few years ago I tried to turn my photography hobby into an online business, but after a lot of time, energy, and money invested I shut it down due to lack of success.
Even though my first attempt failed, I learned a lot and hope to try again in the future with a different business. If I can get a side-business up and running, it can easily add a decent amount of monthly cash flow and help me become more financially secure.
After struggling to build wealth early in my career while following traditional financial advice, I set out on a path to learn about investing. Over a decade later, I’m financially secure and working towards full financial independence through real estate and the stock market. I have succeeded in building my financial ark to help me weather whatever storms may come.
I founded Building Arks to help busy professionals like you ignore mainstream advice and build real wealth.
Contributed by BUILDING ARKS
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