What does income diversification involve?

Income diversification involves generating multiple streams of income from different sources. This approach allows individuals or businesses to reduce financial risk and create a more stable income flow. By not relying solely on one source, such as a single job or investment, diversification helps safeguard against potential losses that could occur if that one source were to diminish or fail.

For example, a person might earn money through a combination of a full-time job, freelance work, rental properties, and investments in stocks or bonds. Each of these streams can provide a buffer against unforeseen changes, such as job loss or market downturns.

This strategy contrasts with focusing only on a single income source, which could leave an individual vulnerable to economic shifts affecting that particular source. Reducing overall income and investing only in stocks would also undermine the fundamental principle of diversification, which is to spread risk and enhance financial security by tapping into various income avenues.