One advice that investors know pretty well is to diversify. In simple words, that is the conventional wisdom of not putting all your eggs in one basket. This applies to many things in life including managing your income resources, which can help you avoid sharp financial twists.
If your household relies on one income, your situation is more vulnerable than someone in a two-income household. Similarly, someone who has a side gig that brings in a fractional income can be in a better position than another who has a single source of income in a job-loss situation. You get the point: More sources, lower risk.
But doing so is not always an option for many people who simply don’t have the luxury of choice. You may be single, or a spouse may have to stay at home to care for children, for health reasons or lack of job opportunities, for example. Similarly, a full-time job may be too demanding or not allowing for taking another job. So what can you do to avoid leaning too much on one source of income?
Here are a few ideas to keep in mind.
Learn a skill
If your biggest fear is to lose your only source of income that is your job, make sure you have a backup plan that can be easily implemented to bring in some cash — even little — right away. This can be anything from building websites to house cleaning or data entry. It also can be taking a contract or a part-time job in your field until a permanent position is available.
Just think of what you’d be able to do in the weeks and months that you will spend between jobs to make any money. Some of these skills will need to be built over time, so don’t wait until a crisis hit to begin your thinking process.
In addition, you should not be discouraged by how little financial rewards you will get from these gigs. Even small amounts of money here and there can help you avoid depleting your savings. At times of uncertainty, you won’t know how long it will be before you get your next regular paycheck, so it is always better to be cautious that sorry — and bankrupt.
Have an emergency fund and insurance
Look closely at your savings and your insurance policies. If you live off a single income, you need all the help you can get in case of an emergency, especially those related to illness or death of a family member. Some types of insurance may not seem relevant to you on a good day, but they can become a lifesaver in emergencies.
Take for example, disability insurance, which can be your fallback plan if you get too ill to work — a fear that many have. Buying life insurance for yourself or your spouse also mean securing the immediate future at least of the surviving spouse and family.
Having a good cushion of savings is the best solution. If that is not an option because of your financial limitations, make sure that you at least have an emergency fund that can cover your expenses for six months or so until you hopefully can get your matters sorted out after an emergency.
Savings with interest
Even when you have savings, you may hate to dip into them right away after a crisis. To avoid this, you should consider saving schemes such as certificates of deposit that have term length like five years or so. These CDs offer higher rates than typical saving accounts, and you can live of the earnings instead of depleting your savings.
There are some penalties for withdrawing your money before the certificates matures, however, so it may be good to still have some savings in other savings scheme. A bank officer should be able to work with you on how to diversify your savings in a way that allows you to collect the most earnings in good days and have a safety net when needed.
One source income?
• Have savings for a six-month period
• Looks for high-return saving schemes
• Learn a skill or hobby that can make money
• Have good insurance coverage
The writer, a former Gulf News Business Features Editor, is a Seattle-based editor.
