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Diversify Your Income Not Just Your Investments

Diversify your income not just your investments

Just about everyone will tell you that it’s important to diversify your investments. It’s pretty standard advice. Building an investment portfolio based on a diversified basket helps to ensure that if there is a significant down turn in an asset class, sector, or national economy you are less likely to experience a crippling loss of investment capital. It’s about investment resiliency.

There are far fewer people who talk about income diversification. But for people who are looking to be financially independent (financial freedom fighters like you and I) – income diversification is an absolute must.

 What does “diversify your income” mean?

Well it’s pretty simple really. It means having multiple sources of revenue making up your annual income. It means not depending on one revenue source, like a job, for all of your income. For many people income diversification takes the form of multiple jobs. This could mean having two income earners in a household or having a second or even a third job. This level of diversification is a good start – however it’s important that you not stop there. To explore this a bit deeper, lets look at the fundamental sources of revenue.

The Four Factors of Production

Economists have grouped all forms of goods and service production into four basic categories: Land, Labour, Capital and Entrepreneurship. Each of these four basic forms offers the potential for income.


Land is a broad reference to the “gifts of nature” that is to say, natural resources. This grouping includes actual land but also includes things like minerals, oil, water, trees, animals, fish, etc.


Labour is the time and effort that people devote to producing a good or service. Labour includes the mental and physical effort that goes into growing food, building, manufacturing, providing services and everything else you do to earn a wage.


Capital is the physical and financial assets that are used to produce goods and services. This includes tools, machines, stocks, bonds, cash, etc.


Entrepreneurship is the organization of the other three factors into a productive enterprise. It’s the development of new ideas for goods and services and realizing those ideas by sourcing and coordinating the land, labour and capital factors needed.

Why income diversification is important?

Diversifying your income is important for a lot of reasons. The three most important are financial resiliency, increased flexibility and choices, and bringing in more money.

Financial Resilience

By having multiple sources of income, you are less dependent on any one source and therefore can handle the loss of any source better. A household with two wage earners is much better positioned to manage a financial crisis like a job loss.

Many people who end up in severe financial distress are there as a result of an interruption to their primary source of income. Having multiple, independent sources of income helps to ensure that even if you lose your job you are not forced to depend on debt or the sale of assets to keep food on the table and a roof over your head.

Increased Flexibility

Having more than one revenue source provides you with more flexibility in your choices. If financial disaster should strike, like you lose your job or a tenant moves out, you have the resources to pick the best response for you. If you lost your job, you’ll have the other income to pay bills while you look for suitable new job rather than taking the first thing that comes because you’re about to have the power turned off.

More Money for Your Goals

Multiple sources of income can provide an important boost to achieving your financial goals. Many people working towards financial independence have second jobs or “side hustles” to supplement their incomes, helping them save more or pay down debt faster.

Diversifying Income Across the Four Factors of Production

Part of having a truly diversified income is having revenue sources that come from more than one of the four factors. Each factor offers a HUGE range of options for revenue:


Factor Method Income Examples
Land Land earns rent Rental properties, farm land rental, resource extraction,   farming, etc
Labour Labour earns wages Your current job, your second job, your last job, your next job….
Capital Capital earns interest Stock dividends, bond interest, capital gains (through asset sale), etc
Entrepreneurship Entrepreneurship earns profit Opening a store, consulting, running a cleaning service, etc

Diversifying Income Within the Four Factors of Production

You can diversify your income within each of the four factors too. For example, within the Labour factor, a diversification tactic would be to make sure that you and your partner work at different companies or within different fields. Doing this prevents disaster should the company you’re working for fail or the industry you work within suffers a downturn. Within the Land factor, diversification could mean that you have both residential and commercial rental properties, or that you own properties in different neighbourhoods or even different communities. Within capital it means that you diversify your portfolio, not depending on one asset class or one stock for all of your income. And in entrepreneurship it means having more than one venture on the go….sort of like bloggers with multiple revenue generating sites.

 How we’ve diversified our income

Years ago I lost my primary job and had it not been for my second job we would have been in dire straights. I had the financial resilience to keep the mortgage paid and the flexibility to explore entrepreneurship. Because of that situation, I can’t image not having a diversified income, both across the factors of production and within.

Jane and I both work, in different fields and for different employers. Also I have a well paid second job. Next, we have invested in two rental homes which are in different neighbourhoods in our city. And finally we have a diversified investment portfolio that returns a monthly income. While we reinvest that income today – it could be used to pay bills if needed. Finally we also use our yard as a source of revenue by vegetable gardening. In the summer months we actually produce a substantial amount of food saving us from having to purchase it in the grocery store. Best part about this revenue source…it’s tax free!

In the future I hope to diversify our income even more. I’d like to purchase more rental property and have been looking at both commercial and farm land. I’d also like to have a small side hustle once I’m done with school. I’ve been thinking about re-starting my consultancy business. This serves two purposes really – one, a new independent source of revenue, and two it establishes the business I hope to run when I’m “retired” from the wage-slavery racket.

If either Jane or myself lose our job tomorrow, we’d be fine. We’d change our spending habits a bit and we’d live on the reduced income. Right now, the additional revenue our multiple streams bring in gets directed to investments and debt repayment. The security and confidence we feel as a result is absolutely priceless.

How do you diversify your income?


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  • John S @ Frugal Rules

    I could not agree more Jack. This is so vital thing to be doing, especially for the resiliency and flexibility aspect. We see it in our own business by coming up with different services we can offer to our clients. That allows us to win new and different clients so we’re not dependent on just a select few.

    • Jack

      Diversification is critical…and it reflects the natural order of things. Healthy ecosystems have a diverse collection of life and as a result are far more resilient than monoculture where a single disease can wipe out an entire field.

  • Grayson @ Debt Roundup

    Nice work on the diversification front Jack. That is one of my favorite words because it is so powerful. I am trying to get my wife to diversify her income, but she is being reluctant.

    • Jack

      :) sounds like you and I are in the EXACT same boat. Jane is frugal but she’s not as myopically focused on financial freedom as I am. I take care of all the non-wage lines of our revenue. That’s okay, as she sees progress, I’m sure I’ll get her on board. Good luck my friend!

  • SavvyJames

    A great topic. I often advise people to develop multiple/diverse streams of income as you never know how one or more will be impacted by forces outside of their control. In fact, in this present economy it is almost a certainty that factors outside of the individual’s control will have an impact – most likely negative.

    • Jack

      I agree totally. The strength and resiliency of diversity is a lesson that the natural environment teaches us. If you structure your whole life around a single source of income you are extremely vulnerable. As the saying goes – don’t put all your eggs into one basket!

  • Laurie @thefrugalfarmer

    Love this post, Jack, and this is something we are working on too. When Rick lost his job in 2010, it was our only source of income, and we ended up cashing out retirement stuff to survive. Now we’ve learned our lesson and are working fervently on diversifying our income.

    • Jack

      A perfect example of why it’s so important to diversify. Sorry to hear that you had to draw on your retirement stash to get by – but glad to hear that you’re broadening your income base today!

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