Multiple Streams of Income - Part I

I have been a CPA for thirty years. In addition I have a master’s degree in taxation. I have provided consulting and tax services for hundreds of businesses and filed thousands of income tax returns. I have seen many changes in the business world over the years, and I feel very strongly that, given today’s economic climate, it is imperative to have multiple streams of income. I also believe there are a number of reasons that home-based businesses are the perfect solution.

This is Part I of a two part series. This part concentrates on why multiple streams of income are important in today’s economic environment, and Part II covers the benefits of owning a home-based business primarily from an income tax perspective.

Section One

The Importance of Multiple Streams of Income

Today’s economic environment is vastly different from the one that existed when I was growing up. There have been enormous changes in professions, corporations, industries and investments over the years.

Professions

When I was born in 1962, it was very typical that parents (especially in a Jewish household such as mine) wanted their children to become either doctors or lawyers. These were considered stable and highly compensated professions. As I progressed through my adolescence and college years, this still remained true. When I graduated from the University of Maryland in 1984, someone pursuing a career in medicine typically followed a path similar to this:

A student (generally at the very top of his or her high school class) was accepted to college, studied incredibly hard, and graduated in four years. The student then went on to medical school for four years and completed his or her residency over the next three or four years. The young doctor at this point would most likely continue to work in a hospital for two years or so and then open his or her own practice or join a small practice and begin the journey toward becoming a partner.

In today’s environment there are very few physician’s offices with five or fewer physicians, and the ones that still exist are struggling to survive. Reimbursement rates have changed so drastically that it does not make sense for these small practices to remain open. Many physicians have sold their practices to local hospitals or large medical groups.

Attorneys unfortunately have also had a rough time of it. This field has become so saturated that many attorneys cannot find work. The situation got so bad that in recent years there were numerous lawsuits in which former law students sued their alma maters for providing misleading information regarding graduates’ success. In today’s rapidly changing, technologically advanced society, law libraries have largely been replaced by online services.

And it’s not just the medical and legal professions, either. Construction contractors that enjoyed multi-million-dollar bonuses back in the 1980s now have a tough time staying in business, although this industry has shown improvement over the last few years. Similar scenarios over the years have occurred with stockbrokers and real estate agents.

I have seen the change in my industry as well. When I graduated from college, very few individuals filed their own income tax returns. Today those with simple returns are able to file themselves by answering some basic questions and entering information into a user-friendly computer program.

The reason I point this out is to alert you to the fact that just because a vocation has historically been a good or safe one, it does not necessarily follow that it will be in the future. Tomorrow’s technologically innovative breakthrough could be the death knell of your career. After all, there was a time when pinsetters (individuals who reset the pins in a bowling alley), elevator operators, and switchboard operators all thought they had job security.

Corporations and Industries

You can choose to look at large corporations rather than just professions that were at one time seemingly invincible and are now just a memory. Examples include Enron, Bear Stearns, Lehman Brothers, Blockbuster Video, Compaq, Eastern Airlines, and Circuit City. This list does not take in to account companies that remain in business but without the same success they once had or those that had to merge with competitors. In the last twenty years, such giants as General Motors and AT&T have had significant layoffs. The banking industry is one where we’ve seen a large number of mergers over the last thirty years. There really is no such thing as “too big to fail.” Whether due to market conditions or scandal, even the largest companies are not bulletproof.

When I graduated college in 1984, it was a given that when you landed your first full-time job, your benefits (in particular medical insurance) were 100 percent paid for by your employer. That rarely happens in today’s world, and many believe that healthcare benefits will eventually be taxed.

Investments

Let’s make the assumption that your job (and/or business) is secure at the moment. How does the investment climate look? Most people have a basic game plan that includes working until somewhere around sixty-five years of age, give or take a few years. What does this entail in today’s world? When I first started my accounting career, the general advice was to deposit $2,000 per year in an IRA, average 10 percent growth, and become a millionaire in forty years. Today, however, it is not quite as easy to earn 10 percent on your money as it was in the ’80s. What options do you have now for investing your money?

The two most popular methods of investing money for retirement are through the stock market or the banking industry. Currently the stock market is at all-time high levels and has performed well recently. Will that trend continue, or are we ready to experience another massive correction? Obviously nobody knows for sure—are you willing to bet your future on it? There are strategies for investing in the market, such as diversifying your portfolio, that increase your odds of success, but there is no guarantee against fluctuating market conditions. Banks are excited about advertising 1.5 to 2 percent interest rates on certificate of deposits. In many cases, though, these banks require you to tie your money up for three to five years in order to qualify for these rates.

All the conditions outlined so far have led to some very sad circumstances. Senior citizens that have worked hard their entire lives are finding themselves back in the workforce. Social security just doesn’t provide enough money to live on, and any money they have saved is unable to earn a high enough return to sustain them. This has also had an adverse ripple effect on today’s youth—many of the minimum wage jobs typically held in the past by high school and college students now are being filled by senior citizens or out-of-work adults.

Real estate has long been considered the gold standard of investments. How many times have you heard, “Buy land—they’re not making any more of it”? If you look at the statistics, you’ll see that the price of real estate in the United States post-World War II climbed steadily until the early 1990s. It quickly recovered from that dip and rose to a new peak before crashing in 2006. Although prices recently have risen substantially, they are not substantially different than the 2006 pre-crash levels and have certainly been much more volatile than in the past.

The Strategic Solution

How does all of this impact you? The answer is that the best strategy in today’s economy is to have multiple streams of income. You wouldn’t put together a stock portfolio without diversifying your assets, so doesn’t it make sense to do the same with your income streams? The potential alternative to not properly planning your future is a situation where you are totally reliant on Social Security and Medicare or Medicaid. Essentially you are stating: “I will let Washington, D.C., take care of me.” Stop reading for a moment and say that out loud. “I will let Washington, D.C., take care of me.” No matter what your political affiliation, that statement has to scare you. Do you really believe that the politicians in Washington are as concerned about your future as you are? This is why I strongly urge you to take matters in to your own hands.