You Need Exactly 2 Income streams

Welcome to 5 mins to Financial Freedom, a newsletter where I share tips to help you manage and invest your money in pursuit of financial freedom. I am giving away a signed copy of my book "The Financial Freedom Equation" enter here for your chance to win.

Why You Need Exactly 2 Income streams

One of the popular topics in?personal finance?is having multiple streams of income.

It’s something I write about all the time. The argument goes like this:

Our human capital aka our ability to earn an income is our most important asset in life.?Therefore diversifying your human capital by having multiple streams of income is a smart way to manage risk.

Great, multiple streams of income; got it. But how many income streams is best? There are many different ways of thinking about this. I’ve read articles arguing for five or more income streams.

In this article,?I make the case for why you need exactly two income streams. No more, no less.

The best emergency fund is one you never need to use

Let’s start with a shared definition of the term “income stream.”?I define an income stream as follows:

A unique source of monthly income to reliably cover your living expenses.

So, if you need $4,000 per month to fund your lifestyle, we will not count a side hustle that makes $600 per month.?If you want to build an unbreakable financial position, you want two unique sources of income that can reliably cover your living expenses.?That $600 per month side hustle will make life easier for you and could one day grow into a full income stream, but until it does, we can’t rely on it.

One of the?most classic pieces of financial advice is to have 3–6 months' worth of living expenses set aside in cash?in case you were to lose your job.?This is a strong financial defensive move.

In sports, some say the best defense is a strong offense, which can also apply to our finances.?If you have a side hustle that can cover your living expenses, you could lose your day job and never end up needing to tap into your emergency fund.?I am not saying you don’t need a strong emergency fund,?but?the best emergency fund is one you never need to touch, and having two streams of income that can fully cover your living expenses is the easiest way to accomplish that.

My two streams of income are helping me build a third

Right now, I have two unique sources of income that can cover my living expenses:

1. My day job.
2. My side hustle.

The real beauty of having these two income streams is that they are helping me build a third stream of income; passive income from investments.

Generating enough passive income to cover your living expenses?is hard?and takes most people their entire lives.?The only way to shorten the amount of time it takes to build that?much passive income is by?maximizing your savings rate, the percentage of your take-home pay that you save and invest.

That’s where having two streams of income is powerful because, by definition, it means you’ll be able to?achieve a minimum savings rate of 50%.?If one or more of your income streams is enough to more than cover your living expenses, you can accelerate your savings rate.?That’s how I am saving 83% of my income.

By keeping my living expenses constant and constantly looking for ways to increase my current income streams, I’ve been able to invest a decent amount of money?relative to my living expenses.

That last point is the key to generating enough passive income to cover your living expenses.

It’s not how much money you have invested that counts, it’s how much you have invested relative to your living expenses.

• $1?million could last a lifetime if you only need $30,000 per year.
• $1 million can evaporate pretty quickly if you need $300,000 per year.

So, right now, I am taking all of?my?surplus money from my day job and side hustle and investing it.?Once I have reached the point where my passive investment income can reliably cover my living expenses,?I plan on dropping one of my current income streams.

Why not three or more streams of income?

Once my side hustle/writing career grew into a secondary income stream,?I got way too excited and tried setting up endless streams of new income:

• Online courses.
• Subscription newsletters.
• YouTube videos.
• A podcast.

Other than the online courses, none of these other income streams amounted to much.

The real problem was that I was spreading myself too thin.?This began to impact my enjoyment of my day job and the profitability of my writing side hustle.

I learned the hard way that my human capital has diminishing returns at a certain point.?Since my side hustle of writing provided scalable income, I was best served to focus on writing rather than these other income streams that all demand?time and energy, which are finite resources.

One day, when one of my income streams is passive income from my investments, it might make sense for me to pursue some of these other income streams.

It doesn’t cost me any time or energy to receive a dividend from my stock portfolio, so this provides an exception to my rule of two income streams.?If one of your income streams is passive investment income, you might choose to maintain three?income?streams or?drop your day job or side hustle and spend more time enjoying life.

After all,?the best use of money is to trade it for more time.

If you're ready to start your journey to Financial Freedom,?I've created this 4-day free crash course on how to use side hustles & personal finance to achieve Financial Freedom.

This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.