After years of being a chronic information addict, I decided I needed to start developing a second income before it is too late. You see, back in 2003 I read Rich Dad, Poor Dad and was bitten by the entrepreneurial bug. I knew I needed to start a business, I knew I had to escape the rat race. So,what did I do? I did the only thing I knew how to do, I read about the topic. I read and read and read. Blogs, magazines, websites and book after book. In 8 years a person can do a lot of reading.
After 8 years, what sort of action have I taken? Well, I founded one business with a group of friends. The company, JacksonSamara, LLC did a little freelance design and developed a few apps for the iphone and ipad. I have recently withdrawn from the company leaving it to the other two owners so they can continue conduct their consulting work and so I can move on.
I created this blog to chronicle my journey towards developing my second income. In the footsteps of my blogging idol, Pat Flynn at Smart Passive Income, I will detail my journey every step of the way. The reasons for this are twofold. First, I want to help those who come after me just as Pat, and others like him, have helped me. Second, I want, and need, to be held accountable. I am easily seduced by information and can spend hours upon hours filling my head with random knowledge. Wikipedia is my greatest enemy.
Now, let’s move on to the reasons it is important to develop a second income.
The reasons for developing multiple income streams are legion, but here are a few that came to my mind as I was developing this blog:
Unless you own your own business, you work for someone else for a living. Everyone, especially those in a single wage earner household, fear the loss of their sole source of income. You rely on that salary and so does your family. What would happen if your income was instantly cut off? For most of us our entire house of cards would crumble quickly. Even a solid emergency fund isn’t always enough in the current economy. Unfortunately, mass layoffs and job loss in the “Great Recession” has been common. Sometimes large corporations layoff tens of thousands at once. Build your multiple income streams before you need them. That way, if the pink slip comes, you will be ready.
Small or no raises
As almost everyone can attest, over the past couple of years pay raises have been few and far between. In fact, people who escaped the recession with their jobs and without pay cuts considered themselves lucky. Anyone who did get a raise probably still lost buying power due to inflation. Sub-inflation raises weren’t unheard of before the recession and certainly won’t be unheard of after it. Many large corporations and unionized workplaces seem to have lock-step or seniority based promotion paradigms that prevent rewards to go to those who deserve it. Even those who know how to negotiate tend to have limited success against the bureaucracy. A second income, in the form of a small (or large) side business lets you set your own ceiling.
Just like everyone knows it is foolish to put all your money in a single stock or fund, it’s risky to rely on a single source for your income. Diversifying your income is key.
Limits on ability to cut spending
Though the first step on the road to financial success is cutting spending so it is substantially below income, one can only cut spending so far. I recommend Get Rich Slowly for advice on how to cut spending. Reducing spending will not be a topic of this blog. One of Ramit’s favorite topics is ranting about how cutting $5 lattes from the budget won’t make a person rich. Even if people pare back on their lifestyle, which is very hard to do, wealth is much more easily obtained by earning more.
Pay off debt faster
Debt is the devil! Nothing prevents a person from following their dreams more than debt. Though I don’t have credit card debt, I do have substantial debt myself. Law school put me six figures into the negatives and a mortgage in Chicago is nothing to sneeze at. In addition to mortgages, student loans and credit cards, many people are faced with auto loans, loans from family members and business loans. Debt is the enemy of freedom and a second income is the best way to slay that demon.
Developing an emergency fund
Though the debate in the financial blogging sphere related to whether one should pay down debt or develop an emergency fund first is fierce, everyone agrees that an emergency fund is important. Without an emergency fund, unexpected costs, large and small, can be catastrophic sending a person spiraling into credit card debt. Putting aside 3 to 6 months of costs is smart, a second income helps achieve this goal.
Entire blogs are dedicated to debating the best way to fund retirement. Some advisers say setting aside 10% of your income (if you start in your 20s) is sufficient. Others say that nobody can realistically set aside enough of their income to retire successfully. Even if you plan on working forever, you may not be able to physically. Developing a second income, especially if it is passive or residual can provide a nice steady stream well into retirement and help you achieve your retirement goals.
Buying stuff you want
Everyone wants something, even minimalists. Are you planning on buying a home or a new car? Do you want to take a dream vacation or send your kids to college. Even something as basic as having kids, though they probably aren’t stuff, costs substantial amounts of money. I myself like outdoors gear and vacations. I hope to enjoy more of those things when I supplement my income.
A second income is important and I’m thrilled to have you with on my journey. I’m sure there will be some failures and hopefully some successes. Thank you for your support, for holding me accountable and for all the advice I know you will pass along.
We should come home from adventures, and perils, and discoveries every day with new experience and character. ~ Henry David Thoreau
Photo Credit 401k