Monday, September 28, 2009

Money for Home Business: Creating Multiple Income Streams
One of the best ways to avoid the whole living in the gutter thing we talked about yesterday is to create multiple streams of income for your home business. This is a very trendy topic right now and I figured I’d clear a few things up.
In order to succeed using this model, there are two main steps involved.
Step One: Diversify your income streams.

When you are starting out, your diversification involves getting lots of clients. If you run a small business or you are a freelancer and the vast majority of your income comes from one company or individual, you do not have a client. You have a boss.


Lots of clients means lots of checks. If one client flakes out, you’re okay because you have other clients. You make your mortgage payment on time, your wife doesn’t leave you, and everybody’s happy. For now.

The reason this is only the first step towards income stream utopia is because this is not a sustainable business model for a company with only one or two employees. You work your ass off and you get paid. You keep working your ass off and you keep getting paid. At some point, you’re going to want to stop working your ass off. This is where step two comes in.
Step Two: Diversify your TYPES of income streams.

There are three main types of income streams. You want lots of income streams coming from as many of these as possible.

Active and Direct

This is the most common type of income. You do something for which you get paid. You take a freelancing gig for $1000. You perform the service and you are given $1000. Your income is directly related to your activity level. You don’t do it, you don’t get paid.
Active and Indirect

This is becoming a more and more common type of income. You write on your blog and get thousands of readers. Advertisers come beating down your door and offer you money to shill their stuff on your site. Your level of activity does not directly impact the amount of money you get – if you don’t blog today or tomorrow or the day after, there will probably be a negligible net impact on your income. It is still active, however, because eventually, a lack of activity on your part will impact your income.
The vast majority of unconventional income streams fall into this category.
Passive or Residual

Everybody loves the idea of passive or residual income. We all seem to have this image of laying on a beach in Bali, sipping a Mai Tai and having hula-clad groupies lovingly applying our sunscreen. The problem with this fantasy is that in the vast majority of cases, it’s crap.
There are very, very, VERY few income streams that are completely passive.
Patents provide residual income. Certain blue-chip stocks that pay dividends provide residual income. Books that are already wildly successful provide residual income. That’s about it.
Figuring out your income streams

To know what kind of income stream you have, figure out this little equation. It’s easy. Look at your activity (A) and your income (B).

If you take away A, what happens to B?

If you eliminate A and B disappears, your income stream is active and direct.
Example: You are working at a job. You quit. Your income goes away.
If you eliminate A and B diminishes over time, your income stream is active and indirect.

Example: You stop blogging. Gradually, readers start to leave and so do advertisers. Your income decreases gradually.

If you eliminate A and B keeps trucking along happily, your income stream is passive.

Example: You are Stephen King. You decide never to write again, and do not engage in any promotional activities. You have invested your money wisely. People keep buying your books and your stocks keep paying out. You never have to worry about money again.
That’s great. Why do you care?

When you know how much of your activity is directly impacting your income, you can decide where to assign your efforts. Like doing the job that’s closest to a bill, if you don’t have enough time or energy to get everything done, work on the activities that provide direct income. As you successfully create more indirect income streams, your level of activity can decrease without impacting your level of income, bringing you one step closer to Bali.
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