• Thu. Apr 18th, 2024

Financial Planners: Why You Shouldn’t Rely on a Single Income Source

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Most people have just one job or income source, but experts suggest that, for true financial security, it might not be enough.

“Relying on a single income source can be risky, especially in an uncertain economic climate,” said Taylor Kovar, CFP, CEO and founder of Kovar Wealth Management

Things like job loss, industry downturns or unexpected life events can significantly impact financial stability.

“Multiple income streams can provide a safety net, reducing the risk of financial hardship if one income source is compromised,” Kovar said. 

Additionally, extra income streams can accelerate financial goals like saving for retirement, paying off debt or funding education.

Economic Instability

Relying on a single income can be risky due to economic instability, according to True Tamplin, CEPF, founder of Finance Strategists

“Job security can be uncertain with an average occurrence of recessions roughly every seven years,” Tamplin said. “Recent economic trends have shown significant layoffs in major companies, highlighting the vulnerability of relying on just one income source.”

He points to big companies that made substantial layoffs in 2023, including Amazon, Salesforce and Facebook, affecting thousands of employees. 

“Nearly a quarter of struggling households rely on a single income,” Tamplin said, “making them more susceptible to financial difficulties.”

Things Can Change in an Instant

Ashley Akin, CPA, senior tax associate and contributor at Dividend Earner, a dividend investing education platform, said her parents always taught her the importance of having multiple sources of income but she didn’t fully understand what they meant until later. 

“Now, as a CPA helping clients of all ages plan for their financial futures,” she said, “I’ve seen firsthand how relying on a single paycheck can be risky business.”

No matter how secure your job may feel today, things can change in an instant, Akins warned. 

“Just ask one of my friends. She worked in marketing for over a decade, steadily moving up the ladder at her company. By all accounts, she had a great career with a bright future. Then, one day, the company announced a major restructuring, and unfortunately her position was eliminated.”

Luckily for her friend, she was able to land on her feet with a new job relatively quickly. “But the scare really opened her eyes to how vulnerable having only one source of income can make you feel.”

Living Paycheck to Paycheck Isn’t a Long-Term Solution

As many as 62% of Americans were living paycheck to paycheck in 2023, according to Andy Cooper, the financial analyst at CouponBirds

There are more risks and less flexibility if you rely on a single income source, he said.

“You can’t ensure your job security as you are unable to predict future trends,” Cooper said. “According to Layoffs.fyi, the number of layoffs in 2023 was higher than 2022. In 2024, Disney’s Pixar [is expected to reduce] its head count by 20%. Google has already eliminated over 1,000 jobs.”

You Need a Buffer To Change Jobs

Another consideration, Cooper said, is that if you want to change your job without an alternate source of income to pad the transition, you will be more likely to get into financial difficulties in the gap period.

Bolster a Stable Income

If you already have a job, building a second income stream is even better, Tamplin said, since you’ve got a stable foundation to build upon. 

“With your main job covering your basic expenses, you can use the extra income from side hustles, investments or passive income sources to boost your savings, pay off debt faster or invest back into growing your additional income streams.”

Here are some ways to create second income streams.

Dividend-Paying Stocks or Funds

Investing in dividend-paying stocks or mutual funds can provide a regular, passive income stream, Kovar said.

“This approach requires some initial capital but can offer long-term returns with minimal ongoing effort.”

Akin agreed, explaining, “Dividend investing provides a layer of protection because it creates income streams separate from your day job.”

For example, had her unemployed friend invested in a diversified portfolio of dividend-paying stocks, she said, “Every quarter, these companies would send her a slice of their profits, a steady stream of income independent of her job. So, if she were to face unemployment, her dividend checks would continue to flow, providing a safety net and peace of mind.”

Once you start getting those dividends, Akin recommended you reinvest them to compound their growth. 

“This might sound counterintuitive, but reinvesting your dividends allows your portfolio to grow exponentially through compound interest,” she said. “Imagine it as planting seeds that sprout new dividend-paying trees over time. The snowball effect can be astounding.”

Start a Side Hustle

Pursuing a side hustle or freelance work in your area of expertise or interest can generate additional income, Kovar suggested. 

“This could include consulting, writing, graphic design or online tutoring, depending on your skills and interests. If you have entrepreneurial aspirations, consider starting a small business or investing in one. This could range from online retail to offering professional services.”

Invest in Real Estate

Real estate investment is also a great way to earn additional income, Cooper said. 

“Despite fluctuations in the housing market, 29% of Americans still chose to invest their money in real estate in 2022,” he said. “If you already have available houses, they can be rented out as your other source of income. If not, you can purchase a property at the appropriate time for renting.” 

He also recommended real estate investment trusts (REITs). 

“They are one of the most attractive places for passive income investors, with an 11.3% return for 2023 as a whole for the REIT-focused index. The minimum investment in a private REIT is $1,000.”

Develop Your Hobbies

Research has shown that up to 39% of Americans have side hustles, making an average of $810 per month, Cooper said. 

“If you have special skills such as writing, editing, web development and translation,” he said, “you are advised to turn to platforms like Upwork, Fiverr and Freelancer, which are built for self-employed individuals and potential clients.”

Just be sure they don’t impede your primary job duties.

Start Small and Educate Yourself

If this all feels overwhelming, Akin suggested you take the time to educate yourself and go slowly.

“You don’t need a six-figure sum,” she said. “Invest a portion of each paycheck, gradually building your portfolio. Remember, slow and steady wins the dividend race.” 

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