Today I have a guest post by Maria Nedeva,who is the creator of The Money Principle where she teaches people in financial trouble how to build sustainable wealth. You can follow Maria’s work on Facebook and Twitter.
You have already heard about sources of income, right?
Earning a living, making money and getting wealthy have at least one thing in common: they all boil down to learning about different sources of income and harnessing these to maximise your actual earnings.
Most of us build our lives on a single income source, usually our work.
Some, the more enterprising part of humanity, have two or three sources of income; maybe they make their money working a job and having a little operation on the side.
Very wealthy people, it is said, have at least seven income streams.
You see, having multiple sources of income is smart.
It means your income and life are protected from the turbulence of the unknown – were you to lose your job, for instance, you’d have something to fall on. You certainly would be making more money. Not to mention the empowerment, excitement and opportunities having multiple income sources would bring into your life.
On the flip side, building more income sources may lead to exhaustion, stress and illness.
Having many income sources is desirable, building them is a matter of deliberate strategy.
From this post, you will learn about the three basic sources of income, how to increase your earning within these, and how to use them to develop winning strategies for making money and building wealth.
Three basic sources of income
There are three basic sources of income you could harness to increase your earnings: your work, other people’s work and investing.
Once you understand the nature of these income sources, and how to increase it and use it for your benefit, you could brainstorm specific ideas and implement them.
#1. Your work as an income source
Work is the main, or even only, source of income for most of us, most of the time.
It matters little whether you have a job, you free-lance, create a website or you have embraced the gig-economy to the full – when you sell your labour, or put differently your time and skills, for money – you are in this modality.
What is the problem?
There are two issues with your work being your main, or only, income source:
- Your time is limited and, therefore, your income is limited as well.
- You must keep selling your labour with no possibility for what has come to be known as ‘passive’ income.
How to improve?
- Upscale your skill set. Your income depends on two things: time and level of skill. There isn’t much that can be done about racking up your time – we all have 24 hours per day, and we all need rest and recreation. What you can upscale are your skills and competencies. Learn continuously, keep abreast of new developments in your field, educate yourself and expand your skills.
- Focus on the value you contribute with your work. Your work must be contributing value to peoples’ lives, so they pay for it. Focus on the value you contribute: how are you helpful? How do you make other peoples’ lives better, easier, more enjoyable?
- Decide what makes you different and better. You will have competition and competing successfully is not about shouting louder. Competing successfully is about finding your ‘unique value proposition’ or making it very clear to yourself (and others) what makes your work different and so much better.
- Learn how to promote your skills. There is nothing wrong with self-promotion. You must learn to do it properly, however. In my mind, elegant self-promotion is about benefits not greatness; it is also about showing rather than talking.
#2. Other people’s work as income source (starting a business)
Do you know about ‘added value’?
Put simply, the added value of a product, or a service is the difference between its price and its production cost. Added value come from work.
Using the work of others as a source of income entails having a business and employing people. For instance, if you have a website and you do everything you make money from your work. Employing writers, on the other hand, is a step towards having a business and appropriating the added value from their labour.
This is not morally objectionable it you pay fair wage, for fair work.
This is how business works.
(An interesting question here would be how does automation change this? Robots’ labour adds much value to products and services and there is no wage to pay.)
What is the problem?
The following problems need attention:
- Starting a business, not a self-employment gig, is not everybody’s cup of tea.
- Running a business need skills and competencies that go beyond the immediately technical.
- Choosing a niche is not a trivial task.
How to improve?
- Start a business that is hard(er) to fail. Any business could fail, true. Still there are some businesses there are harder to fail than others. Businesses where: a) you are paid twice (like being paid to take garden waste away, composting it and selling the compost); b) you provide service that is a requirement (MOT, for example); or c) you help people achieve a dream (looking and feeling better, for instance) are easier to build and grow.
- Learn how to run a business. Building and running a successful business demand knowledge about process, hiring and retaining people, financial management, leadership, sales, marketing etc. Technical and specific knowledge is not enough.
- Experiment. Be prepared to fail. Even better, be ready to start again.
- Become an ideas factory. Successful businesses are built around implemented ideas. Statistically, eight out of every ten ideal fail. Starting and growing a business requires you to become an ‘ideas factory’; e.g. you should be able to generate and test ideas at high rate. This is a skill that can be learned and developed.
- Learn to spot business opportunities. Business opportunities come regularly and often; just learn to spot them.
- Develop discipline for implementation. Spotting business opportunities is only part of the matter; the other part is having the courage and developing the discipline to implement them.
#3. Investing as an income source
Investing is best described as ‘a way to make our future self a present’. Investing wisely can bring:
- More earned income (investing in developing your skills and competencies).
- Dividend income.
- Rental income.
- Royalties income.
What is the problem?
- High entry costs in terms of capital.
- High entry costs in terms of knowledge.
How to improve?
- Save and invest proportion of your income regularly. Most people don’t invest because they don’t have enough money to put aside. Start small but save regularly. You can also look at ways to increase your income (while keeping your spending constant). Just start and commit.
- Learn about different investment options. When it comes to investing, knowledge is essential. Luckily investing has been democratising and there is plenty of knowledge and help, out there. (Make sure you are using reliable sources.)
- Make use of digital wealth managers and index funds. Digital wealth managers are on the rise. Examples of digital wealth managers operating in the UK are Nutmeg, Scalable Capital, Exo Investing, Moneyfarm and others. Using different investing algorithms and pre-set portfolios these providers have democratised investing further by reducing the amount of specific knowledge that is required. Another possibility if to use Vanguard and their set of index funds and off the shelf portfolios.
- Follow the absolute rules of investing. There are many rules of investing but the once that must be followed without fail are: a) think about losses before you think about gains; b) hedge by diversifying investments; and c) stay for the long run.
Are you ready to increase your earning and diversify your sources of income?
Now that you know what the three basic income sources are, what are the potential issues with them and what steps you could take to improve your earning it is time to act.
Grab a pen and paper and trace your income streams. Are these from one basic source?
Do you rely on your work to make money even if you have more than one income stream?
Next, brainstorm ideas for opening a new income stream. Focus on how you transition it from using your work to be a business.
Make a list of investments that can generate income. Test your ideas and test them fast.
You can transform the structure of your income and you can start doing it now.