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A new approach to personal income and how to grow tt
An investment portfolio is how we allocate our assets, also known as asset allocation. It provides diversification of returns and risks. If you've been saving and investing for a while, it's nothing strange to you.
While thinking about an investment portfolio helps when we're planning for retirement or working towards a net worth goal 20 to 30 years later, it's less helpful in our daily life after we have the strategy nailed down.
Based on personal experiences, while it's important to invest in the right assets, the very few things I have control over are:
It got me thinking about my income—how much I make in a month, a week, or a day.
If an investment portfolio is the high-level, big picture path to creating wealth, what is the street-level approach that helps us navigate our daily financial decisions and hopefully achieve a few short-term lifestyle wants along the way?
Most of us have more than one source of income. Like how an investment portfolio show us our asset allocation, an income portfolio is a snapshot of how and where we make our money.
Having an income portfolio gives you a better picture of where you are now:
With these insights, you get to build better strategies to achieve both your short- and long-term goals, whether it's switching career or creating an additional income source.
Here's how my income portfolio looks like for 2020:
My income portfolio is made up largely by my day job at AppSumo plus revenue from this blog and other investments.
Since I wrote about protecting downsides, I've been thinking about how I can level up to protect my income too. Protecting my income also strengthens my investment portfolio by feeding more cash into the system and letting it ride for as long as possible. The two things I mentioned above.
So how do you protect your income?
We will dive into the second option in this article. Here are a few income sources I come up with that may apply to most of you who are reading:
Most people start here. It's easier to get started here because you're dealing with one client—your employer—and most of them pay for your time instead of the outcome you create. But if you want to level up, go for a job or company that keeps you accountable based on your outcome.
While this is a part of your investment portfolio, guess what, it generates income too. Saving interest goes here. Stock dividend and appreciation go here too when you withdraw them as realized gains. Passive investment generates paltry income until you have a significant nest egg.
Unlike passive investment, active investment takes more time and energy. Some examples include trading and real estate investing. You don't generate an income by simply buying and holding these assets, but by managing (finding a tenant) or trading (finding the next buyer) them.
Here people pay you to carry out a task. But unlike a day job, you're providing your services to more than one client. Your client can pay you for your time, the deliverables (the task carried out), or the outcome. Like working at a day job, the trick to level up is by selling your services based on the outcome you create.
With product income, you create and sell a product. It could be a physical or digital product via both offline or online channels. You could also productize your services with automations and systems to remove yourself from the process as much as possible.
Here, you make an income from the venture when someone purchase something you promote or sell. You don't provide a service or manufacture a product, you only promote and sell it. Traditionally, this includes product distributors, salespersons, insurance agents, and more. Personally, I'd consider channels like affiliate marketing, ads earnings (Google and YouTube), and platform profit sharing (Udemy and Skillshare) in this category too.
Community income is nothing new, but it's gaining more traction lately. Some examples include income from platforms like Substack, Patreon, and Buy Me A Coffee.
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These are broad categorization based on what I know and how I view the world. You can go broader (but that's probably not helpful) or more specific with how you want to create your income portfolio. For example, a salesperson who makes most of her income from commissions might want to get specific with the sources of where the commissions come from.
Each of these categories also has unique characteristics. Here's a table of how I think about them:
I'm using a range here because these characteristics vary from time to time and person to person. To clarify what each of them means:
Here's how my income portfolio looks like when I break it down based on these categories:
While the return of my passive investment makes up over 1% of my total income, I don't consider all of it as an income because I haven't withdrawn it. The 1% I have right now is mostly interests earned from cash saving. I also have an investment property but it generates zero income because of the pandemic.
Here are more unpolished thoughts about the concept of income portfolio:
While building an additional source of income is never a bad thing, it's okay to depend on one single source of income as long as you think through your plan B in case of the source get affected by unforeseeable events.
There are people who make a handsome salary from their jobs and there are people who live on the income generated by their investments. So it's totally fine if you're not interested in creating multiple sources of income, or at least not now.
If you run your a business or think about starting one, note that many of these income sources are interconnected in terms of resources. For example, if you're generating an income from a YouTube channel, the audience is also a resource if you want to create and sell some kind of product.
Your day job could provide the resources, in terms of capital, stability, or network, to a new income source, be it starting a business or investing passively.
Creating a new income source usually takes a lot of time and work, especially when you're just starting out. You can invest in passive income sources, but if you're going into active ones, make sure you focus on only a few at a time.
The 25/5 rule is an effective principle to think about focus and prioritization. While you're going through the process, know that making more money isn't the only thing that takes up your time and energy. Other life areas are fighting for your attention too. And it's certainly not the only thing that makes up a meaningful and successful life.
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That's what I have to say about income portfolio. What do you think about the concept? And how does your income portfolio look like? Feel free to share with me on Twitter.