An investment portfolio is a set of assets you own that help grow your wealth.
With proper asset allocation and diversification, you can accumulate significant wealth with limited risks over time—by consistently adding money into the portfolio for two to three decades.
But what if you want to make more money now? That's when you should focus on your income instead of your investment. And what if you also want to minimize the risk while earning more?
Enter income portfolio
In an article on protecting your downsides, I shared how you can minimize risks and build a stronger foundation financially. Most of the strategies I mentioned in the article focus on spending.
The truth is your income is another powerful lever in building a solid financial foundation.
The first option is to make more money from your primary income sources. Be it a full-time employment or a small business. While it might be easier compared to building something new from scratch, it's fragile to depend all your income on one source.
A better alternative would be to diversify your income by creating new income sources. Just like how you diversify your asset allocation in an investment portfolio.
Making $10k a month from five sources is at least 5x better than making $10k a month from a single source.
The 7 primary income streams
And here are a few primary income sources that make up an income portfolio.
1. Day job
Most people start here. It's easier to start here because you're dealing with one client: your employer. And most day job pays you for your time because it's easy to quantify. But if you want to level up, go for a job or company that keeps you accountable based on your outcome.
2. Passive investment
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. The valuation of your business goes here too. In short, you generate income here through ownership.
3. Active investment
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.
4. Services
Here people pay you to carry out a task. But unlike a day job, you provide services to more than one client. Your client can pay you for your time, the deliverables, or the outcome. Like working at a day job, the trick to level up is by selling your services based on the result you create.
5. Products
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 automation and systems to remove yourself from the process as much as possible. It's a powerful income source because you get to build once, sell twice, a concept coined and taught by Jack Butcher from Visualize Value.
6. Commission
Here, you get paid a percentage when people buy 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. I would also consider channels like affiliate marketing, ads earnings (Google and YouTube), and platform profit sharing (Udemy and Skillshare) in this category too.
7. Community
Community income is nothing new, but it's gaining more traction lately. You make money by bringing people together and giving people access to something valuable in a recurring manner. Some examples include income from platforms like Substack, Patreon, and Buy Me A Coffee.
These are broad categorizations 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.
How to know what income stream is right for you?
Each of the seven income sources I shared above has unique characteristics that can be broken down into ranges of effort, probability, impact, and risk.
- Effort is the time and energy required to build and grow the income source. Low effort means it needs very little time and energy, and high effort means it takes lots of time and energy.
- Probability is the chance of success. By success, I mean getting something out of your effort, regardless of how small or big it is. Low probability means a high chance of total failure, while high probability means a high chance of success.
- Impact is how significant the outcome will be if successful. Since we're talking about income, low impact means less money, and high impact means making a ton of money.
- Risk is what you have to lose. Other than financial loss, I would also consider wasted time and missed opportunities as part of the risk. Low risk means it has very few downsides, while high risk means the downside is great if it fails.
One thing to note is that the range of effort, probability, impact, and risk varies from person to person. This is because every person has different environment, talents, and skills.
Like how an investment portfolio represents your asset allocation, an income portfolio is a snapshot of how you make your money.
Building an income portfolio of your own gives you a better picture of where you are now. It also helps you think about where you want to go when you assess them based on the effort required, probability of success, impact it creates, and the risks it has.
