But diversify to keep it.
What this means simply is that you have to be very good at one single thing to make a lot of money. However, if you keep all your money in this one single thing, you might lose it.
Therefore, you have to diversify out of your specialisation to keep your hard-earned money. Even increasing your income is not enough, you really have to be able to keep it.
The Business Owner
Maybe the traditional example would be the business owner. She is very successful in her own field, and everybody hires her. Because of that, she makes a lot of money. However, this money can be gone any minute…
What I mean is that business income is depending on a lot of factors, and while it can be a lot of money, outside factors can make you go bankrupt really quickly.
It’s common I think for business owners to go all in with their business. Their entire personal worth is tied to their company. But what if it goes bankrupt? Then everything is gone.
Investing in other assets is a way to hedge against this risk. If the entrepreneur would take regular distributions from the company, and use them to invest some of the business’ profits in index funds, the risk of losing it all becomes smaller every year as the investment portfolio grows.
In a way she is diversifying her business to about 6,500 other business, by buying small bits and pieces of these other business with her profits every month.
The Regular Joe
The same principle applies to the regular Joe. He might live a comfortable middle-class lifestyle, making a regular salary at a regular job. But what if he loses his job? Will he be able to pay off his debt, or to buy food and clothing?
Maybe, maybe not. That depends on a lot of factors. One of them is his ability to generate passive income.
Say our Joe was a smart guy, and invested 50% of his salary into a rental real estate portfolio. Then he might earn some nice passive income on the side, outside his day job. Now when he loses his job, he’s still making some income.
I think both cases show that creating additional sources of income or wealth are extremely important to keep your money. It’s not for nothing they say the average millionaire has seven streams of income.
Yes, being a specialist might make you tons of money, but what are you doing to preserve this?