[Editor's Note: Today's WCI Network post is from Passive Income, MD. In April I wrote about 3 Ways Diversification Saved us During the CoronaBear. Unfortunately, it's 5 months later and very few of us have not felt the impact of lost income, increased stress, and uncertainty in these times. Still, diversification hasn't failed me and continues to protect my family from unforeseen risk. Enjoy the post!]
The past few weeks have been challenging, to say the least. We’ve seen a lot of changes in the world, and many, many people have been affected. But this time has also provided a great financial opportunity: the chance to take a step back, assess, and course-correct as necessary.
This is important, because the path to reaching your goals can be a winding one–that is, if you don’t take the time to trim out the things that aren’t working and grow the things that are.
It’s so important, in fact, that over the next few months, I’m going to be introducing something that I call the IDEAL™ system.
The IDEAL™ system stands for Identify, Determine, Execute, Assess/Adjust, and Leverage. These are the exact steps I’ve used to reach where I am now, and it’s kept me striving for where I want to be.
More information regarding this system will be coming soon, but for now, I want to focus on the Assess/Adjust step. As I mentioned above, this is a vital step in reaching your goals. And with everything going on, I’ve been focusing on this step quite often.
I was in residency when the Great Recession of 2008 hit, so these recent events have been the first true challenge to my financial strategy.
While 2008 brought what seemed like some very difficult challenges at the time, I now see that I was fortunate to have those few warning shots early in my career. They alerted me to the idea that relying entirely on medicine for my financial and emotional well-being was not the best way.
I learned that in medicine, job security isn’t what most of us thought it was. We’re now seeing true examples of this, with physicians being laid off or their salaries being drastically reduced.
We’re also seeing that we can be replaced. Not only by other providers, but even with developing technology, like artificial intelligence. I cannot stress this enough: we doctors are not irreplaceable – as much as we like to think we are.
We do have one big advantage, though: when we are working, we’re able to produce a decent amount of capital fairly quickly. Sure, it’s linked to the amount of time we put in and can come with a significant amount of stress, but nonetheless, we have capital to invest.
Over time, I’ve learned that in order to create my own financial security, I need to take that capital and deploy it quickly and effectively, while taking some smart risks.
As a result, for the past few years, I’ve been working hard on diversifying my income streams. I want to make my cash flow bulletproof; if one income stream goes down, I have another to rely on. And if that goes down, I have another one . . . you get the idea. The goal is to always have another stream to rely on.
Of course, I’ve never pretended to have it all figured out. This blog has been more of a personal journey and a chance to document things I’ve been learning along the way.
I’ve simply modeled myself after some of the people that I consider the most wealthy. And when I say “wealthy,” I mean a lot more than money. I mean that these people have the time and resources to live their ideal lives, and that life fulfills them.
These wealthy folks seem to be extremely diversified. From the outside it might seem like they have one main source, but upon digging, it turns out they’re creating income from all sides.
Now, I’ll openly admit that trying to implement these multiple streams has been a bit crazy at times, with my attention having to be focused in so many areas. It’s even been uncomfortable at times, having to learn and trying something new.
So why not just keep to what is easy and comfortable?
Well, all along I was convinced that a time would come when I would have to rely heavily on these streams of income. Unfortunately, that time has come.
No, I didn’t imagine it would be exactly like this. In fact, at times, this situation has been even more anxiety-provoking than I ever dreamed. But again, I’ve been trying to focus on what I can control, not what I can’t.
My Current Situation
We’ve all heard of portfolio diversification. And of course, it seems to make total sense. That’s why many investors opt to have more than just stocks as part of their retirement plans, and invest significantly in real estate. It’s why many investors choose diversified index funds instead of a single stock. It’s why many invest in real estate funds instead of a single syndication.
However, when it comes to true income diversification, most people feel totally comfortable with having one source account for more than 90% of all their cash flow. It’s understandable; having a single, main source of income has been traditional wisdom for years, and there’s a certain element of control in that as well.
But seeing physicians’ salaries get abruptly cut–and others replaced entirely–has made a big impact on me. Because of this, my goals have changed over time. Over the last few years, my goal has been to diversify in a way that no single income source accounts for more than 50% of my overall income.
This is not easy or quick to achieve when you’re trying to replace a physician’s salary. In fact, in the beginning, it feels painfully slow (my first real estate investment brought in less than $50 the first month).
Ever since that first real estate investment though, I’ve focused heavily on creating businesses and investing in cash flowing investments in order to hit my goals.
By now, you may be wondering how that’s been going for me. Well, here’s the current list of my income streams:
- Physician income
- Active real estate portfolio (rental properties)
- Passive real estate equity deals (syndications and real estate funds)
- Passive real estate debt deals
- Online businesses
- Dividend stocks
- Peer-to-peer lending
- Savings accounts
You may also be wondering how these streams of income have been performing lately. To answer that, let’s go through them one by one.
It’s only been a few months, but my physician income has already significantly decreased (I was recently told that I would be working the same hours but getting paid less).
The rental properties have been stable with more than 85% of residents paying their rent. However, I recognize that future months could be different. I’m fortunate that every one (except for my recent rental property purchase) produces cash flow in spite of vacancies or unpaid rents.
The passive real estate equity deals haven't distributed as much cash, as sponsors/syndicators are expecting further volatility. So I haven’t been receiving full distributions. But the expectation is that they will catch up on these distributions in the future. Some cash flow still remains from this source, though it is also less than before.
My passive real estate debt deals have continued to pay me on time. If you’re not familiar with these deals, I’ve basically lent out money and acted as the bank, expecting to get paid interest on these loans. So far, these haven’t been affected.
My online businesses continue to operate. While there is some decreased cash flow, they continue to produce income. The best part is that they aren’t correlated with my other sources of income in any way, so there’s very little risk involved here.
As for the rest–peer to peer lending, dividend stocks, and my savings account–I continue to receive cash flow, though even the combined amount is negligible.
Overall, my cash flow is down. But not nearly as much as it would have been if I’d relied solely on my income as a physician.
But now for the big question.
Will These Streams of Income Be Enough?
It’s a valid question, and one I’ve been asking myself more and more lately. How long will this economic slowdown last? Will it continue to impact my sources of income, and are there other ways to create more?
With these questions in mind, I’ve been checking out some options.
For example, I’m looking at more lending opportunities.
Investing in real estate debt deals often misses out on some of the greatest opportunities in general real estate investing–the tax benefits. Because of this, people often avoid investing in real estate debt.
However, from an income-producing perspective, it can be a reliable source of monthly income–especially if you have a decent portfolio of investments. So I plan on looking at more real estate debt deals.
I’m also looking to diversify further in the debt space. I have my eyes open for opportunities to lend money to private companies who need a source of capital. I’m also looking to invest in more structured and higher-quality peer-to-peer lending opportunities than those I’m currently involved in.
I’ve also started looking into tax efficient bonds. Now, I’ve never liked the idea of bonds. They always felt boring and their low returns looked unattractive. But I realized they are essentially debt deals. Investing in them would just be like diversifying my debt positions. So, I’ve started looking into good opportunities in this market, and especially ones that are tax free.
Finally, I’ve been thinking about expanding into more businesses, especially online. There are still plenty of opportunities–especially when it comes to partnering with existing businesses.
I’ve been exploring these opportunities, and have looked into possibly even purchasing cash flowing businesses that have already been established. This is still a developing idea, and I don’t have too many details to share at the moment. Suffice it to say, there is a lot of opportunity in this space.
Peace of Mind
Ultimately, the greater the number of your streams of income, the more you’ll be able to withstand difficult times like these. And it’s important to realize that even if you have already established a good portfolio, it’s worth stepping back, evaluating, tweaking things, and adding more as much as possible.
Yes, there are many benefits of diversifying your streams of income. But the greatest benefit of all is the peace of mind it brings. While nothing is truly bulletproof (as much as I’d like it to be), there is no doubt that there are always ways to improve what you currently have.
I’m making the best of this time by doing just that–and I hope you are as well.
How are you adding to your streams of income? Do you feel like you’ve achieved your ultimate diversification?
Featured Real Estate Partners
Great post and definitely such an important concept! My income diversification has focused on cash flowing active real estate deals and stock dividends. I am developing online businesses that couple to my passion to help others gain financial well being. These are all in the beginning stages. It’s great to hear that your diversification has helped you during these volatile times and will be interested to learn how your new pursuits with more debt deals etc go!
The Prudent Plastic Surgeon
Great post and glad to see reinforcement of a concept I had been applying to myself recently.
One thought for all those who are experiencing economic uncertainty: military medicine has been trucking right along, no lay offs, no furloughs, no paycuts. Pay isn’t as good to begin with (depending on your specialty), but it’s better than zero, takes a literal act of congress to change, and the checks are as reliable as interest on a Tbill. Even allows for some degree of income diversification by moonlighting!
Do you get a guaranteed pension and guaranteed health care for life if you work for the military?
I work for the state, have seen no impact on salary, in fact we got “incentive pay” for working during a pandemic! The extra 15K that I have made since March was very nice to have.
Remember that time a few years ago when military folks’ paychecks got delayed for a while? I do. 🙂
Our biggest diversifier right now is having two salaries.
Net salary (62.6%)
Husband net salary (32.7%)
Net rental income (2.9%)
Dividends (1.6%)
Bank account interest (0.2%)
Really interesting read, PIMD!
I agree with the idea of multiple income streams as mentioned above. In my WCI podcast posted on 9/3 I discussed leveraging multiple income streams inside of medicine. I went through a phase where i became extremely distraught that i wasn’t making money while i wasn’t at work. I have several friends who are successful in business who are constantly having lunch meetings that turned into afternoon cocktails or a round of golf. I did have a little envy of the freedom to be able to make money while not working. I ended up spending a lot of time, money, and effort researching ways to make money outside of medicine or the requirement of my presence. This is a very difficult task. I tried several. ventures and most failed and one cost me 7 figures. I still have some of these things but came to a couple realizations.
1. It is very difficult to make a significant amount of money in a business when you are not present. My friends who get to golf in an afternoon have spent enormous amounts of time to get where they are or a few inherited the enormous amount of time their ancestors spent.
2. We can make a lot of extra money in medicine. I refocused what i was doing and leveraged my services and made an extra 200k per year. I have another GU whom I mentor on contracting and he just sent me a text stating he made $11,400 for call this weekend plus billing. In hindsight, i should have done this refocus a few years earlier and i would have been in a better spot. My advice is to focus on what you know and lever that to its extent before moving into real estate or some other venture. Definitely not as sexy but sound advice.
7 figure Uro
110% with you on this! Sound, not sexy advice. We’ve been to school for more than a decade. We oughta be able to leverage that expertise into higher/additional income streams.
‘I’m fortunate that every one (except for my recent rental property purchase) produces cash flow in spite of vacancies or unpaid rents.’
Maybe I am mis-understanding the context of this comment, though a vacancy produces zero monthly income and ‘unpaid rents’ is a shade of squeezing blood from stone based on local/state regulations. I would appreciate some additional context for this statement.
Perhaps referring to the entire year…still cash flow positive despite a vacancy for a month or two. Dunno.