How to diversify your income and why

Most of us earn income from our day jobs… and that’s about it! We might have a few bucks coming in from bank interest or investments and perhaps some income from a weekend side hustle — but the majority of income tends to come from a single source. 

It doesn’t have to be this way! When you learn how to diversify your income, you pave the way to both extra cash and more financial security. 

In this guide, we’ll cover the benefits of having multiple income streams and outline several ways you can diversify your income. 

What are the benefits of having multiple income streams?

Before we dive into how to diversify your income, let’s talk about the why. There are many potential benefits of earning money from multiple sources:

• Greater financial stability: If you have money coming in from multiple sources, you’re less vulnerable to a sudden change or job loss. 

• Greater earning potential: Earning from multiple income streams can improve your overall earning potential.

• Potential for passive income: Many alternative income sources can help generate passive income. Passive income is money earned without much (or any) active effort on your part. 

• Better cash flow: Cash flow refers to money coming in and out of your household. With income from multiple sources, your cash flow will tend to improve. 

• More growth opportunities: With a traditional job, your opportunities for growth and income increases can be somewhat limited. With many alternatives, such as starting a small business, growth potential is theoretically unlimited. 

How to diversify your income

Diversifying your income involves taking steps to generate extra income from multiple sources. This could be any combination of wage income, business income, interest income, and other potential sources. 

The specific path you take to diversify your income sources will depend on your financial situation, skill set, free time, and the opportunities available to you. We’ll cover some specific ideas later on in the guide. 

First, let’s dive into the two main types of income: Active and passive.

Active vs. passive income

Active income is income that you put in direct effort to earn. It’s essentially trading time for money. Examples of active income include:

• Income from a traditional job

• Income from a side hustle, like rideshare driving or mowing lawns

• Income from contract work or freelancing

Active income doesn’t necessarily require much to get started — most people can find a job, start a side hustle, or earn side income in some way. But time constraints can limit earning potential, particularly if you’re already working a full-time job. 

Passive income is income that requires little to no active effort to earn. In other words, you can earn passive income while you sleep. Examples of passive income include: 

• Interest from your bank account

• Dividends from your investments 

• Rental income from properties you own

Passive income often requires a significant upfront investment of time, money or both. For instance, it takes a lot of money to buy a rental property or invest a substantial amount in the stock market. On the flip side, earnings from passive income are theoretically unlimited, as they aren’t tied to the amount of time you put in.

Creative ideas to diversify your income

Ready to get started? There are dozens of potential ways to diversify your income! Here are some ideas to consider first.  

Are you a teen or the parent of a teen? Check out our roundups of teen side hustles and small business ideas for teens for more youth-specific ideas. 

1. Start a side hustle with a gig-economy app

A side hustle is an active income opportunity that you complete in your spare time, often in addition to your primary job. The easiest way to get started is to use a gig economy platform like Uber or Rover. You could:

• Drive for Lyft or Uber

• Walk dogs or pet-sit on Rover

• Complete tasks for neighbors on TaskRabbit

• Provide childcare on Care.com

• Deliver food via Doordash or UberEats

• Shop for groceries via Instacart

The great thing about these platforms is that they help you connect directly with paying customers, so you won’t have to advertise your services. They’re also quite flexible with timing and have low startup costs. 

2. Start a local small business

It can be hard work to run your own business, but it can provide strong potential for growth and income. The type of business you might consider starting depends on your interest, skills, and local economy, but here are some ideas:

• Open a coffee shop, cafe, or restaurant

• Start a service-based business, like an auto detailing service or a landscaping company

• Purchase a franchise business, like a gas station or fast food restaurant

• Open a small retail store, like a clothing boutique or convenience store

• Start a small craft brewery or taphouse

The possibilities are endless here. Start by looking at your local economy and asking yourself what might be missing. What business might do well in your town? What are business owners in adjacent towns doing with success, and how might you replicate that? 

Starting a business can involve significant upfront costs, but there’s quite a range. On the low end, as little as $10,000 might get you started with something like a mobile auto detailing business. On the high end, you might need $500,000 or more to start a restaurant or taphouse. The Small Business Administration is an excellent resource for entrepreneurs looking to start their own businesses. 

3. Start an online business

You can minimize startup costs while maximizing flexibility when you take your business online. The downside is that you may face more competition and have to put more effort into advertising and attracting customers. To launch an online business you could:

• Sell on Amazon or eBay

• Resell used items online

• Sell your homemade products on Etsy or Shopify

• Start an eCommerce website

• Start a blog or YouTube channel and monetize via affiliate marketing

• Start a drop-shipping resale company

• Create online courses or other digital products to sell online

• Start a podcast

Generally speaking, online businesses have lower barriers to entry (meaning they’re easier to start), but they also may take more time to get going. 

4. Earn passive income by saving and investing

You’ve surely heard the saying that it takes money to make money. And it is true that investments that start with some money can really make your money grow! You can earn passive income automatically by investing your savings. With extra cash, you could:

• Invest in dividend stocks

• Buy stock market index funds, like the S&P 500

• Invest in real estate investment trusts (REITs)

• Purchase bonds or bond funds

• Save in a high-yield savings account or certificate of deposit (CD)

With this type of opportunity, you’ll typically earn a percentage of your investment. For instance, an S&P 500 index fund is a way to easily invest in 500 of the largest companies in America. Many of those funds pay dividends, which are a form of interest. Right now, the yield is around 1.75% — so you’d earn $175 per year for every $10,000 you’ve invested. 

Keep in mind that many of these investments also have the potential to increase in value. The dividend yield might be just 1.75%, but if stocks also appreciate in value, you’ll profit in two ways at once! Investing is a great way to build wealth and provide income diversification. 

5. Monetize your skills by contracting, consulting, or freelancing

Each of us has a particular skill set, which in many cases, can lead to additional income! Put your talents to use and:

• Become a freelance writer or freelance designer

• Consult for companies in your industry

• Pick up part-time work as a contractor in your industry

• Complete freelance tasks on platforms like Fiverr or Upwork

• Offer services in your community based on your skill set

Many of these opportunities can utilize a skill directly related to your career, but it could also be a completely separate skill or interest. 

6. Monetize your assets by renting them out

Another way to diversify your income is to use your existing assets to generate a profit. Depending on what you have, you could:

• Rent out a spare bedroom on Airbnb

• Rent out your car on Turo

• Remodel your basement to create a separate apartment to rent out

• Rent out your vacation home or timeshare on VRBO

This is another category that requires that you own assets, but it can be a relatively simple way to make your existing wealth work for you. 

Diversifying your income = financial freedom

Expanding your sources of income can be a powerful step towards making more money, feeling more financially secure, and pursuing financial freedom. Whether you keep things simple with one or two additional revenue streams or go all-in on several different income sources, if you learn how to diversify your income, your wallet will thank you.

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