Personal finance pundits everywhere like to extol the benefits of an emergency fund. They’re certainly onto something; emergencies inevitably happen and it’s silly to not prepare.
Many people graduate to having an emergency fund of at least three to six months’ worth of income, with the main reason being to guard against getting fired. Losing your job can be devastating financially even to those with sound habits.
But I like to look at things differently. An emergency fund is a good step to insure against a job loss. But there’s a far better solution.
That solution is multiple income streams.
Somebody with multiple sources of income will be in comparatively better shape than someone who relies on a sole source. Diversification is a fantastic thing.
Take two people who each make $5,000 a month. One gets every nickel from their employer. The other only makes $3,000 a month from work, but also has $1,000 per month in dividend income and another $1,000 in rental income. It’s obvious the latter is in better shape if they lose their job.
Most people don’t have enough capital to generate a sizable amount using only passive income. They must use their evenings and weekends to generate other income streams. They could freelance on the side or create a website that makes money on ads, which are both relatively flexible pursuits. Or they could get a more traditional part-time job.
Once you have a solid emergency fund in place, it’s time to start scouring the world for other income streams. Get enough of those and you’ll be financially free in no time.
