Economic redundancy: two incomes are one, and one is none

Ask a room of preparedness-minded people how many ways they can start a fire, purify water or cook without the grid, and most will have two or three answers ready. Ask how many ways they have to pay the mortgage if their job ended on Friday, and the room tends to go quiet.

That gap was much discussed in 2011, in the long aftermath of the 2008 financial crisis. A great many households had discovered that the paycheck they relied on could stall or vanish. A typical story from that period goes like this: a steady salaried job, but no raise for several years while fuel, groceries and property taxes kept climbing, and then an unplanned medical bill, say around the birth of a child. Nothing dramatic, yet the family ends up living paycheck to paycheck, unable to pay down debt. Anyone who prepares for storms and outages can prepare for that too.

What economic redundancy means

Redundancy is a familiar idea in preparedness circles, usually summed up as “two is one, and one is none.” Take fire. A kit with only a lighter has one point of failure: the lighter gets wet or runs out and the fire plan is gone. Add a ferro rod and there is a backup. Add the skill to make fire by friction from what grows nearby and there is a third layer that cannot be lost or left behind.

Economic redundancy applies the same thinking to money. A household that depends on one income and one way of holding its savings has a single point of failure. The aim is to have more than one source of income and more than one place where wealth is kept, so that losing any one of them is a setback rather than a catastrophe.

Why one income is fragile

The old bargain has gone

For the generation that fought the Second World War, a job with a big employer often meant a job for life. People stayed with one company for decades and retired on a defined-benefit pension. That model has mostly disappeared from the private sector. Pensions have been frozen or cut, and when Enron collapsed in 2001, employees who held much of their retirement savings in the company’s own stock lost their jobs and their nest eggs in the same weeks. Long service is no protection in a layoff.

A job is income, not security

A job is a good thing to have, but the employee does not control it. A merger, a lost contract, a new manager or a downturn can end it with a two-word conversation. Security comes from control, and a household with only one paycheck has very little.

Public benefits are a floor, not a plan

Pensions, social insurance and public assistance matter, and most people will rely on them at some point. But their amounts and rules are set by legislation and budgets that change, and payments can be delayed or reduced. Treat them as one layer among several, not the whole plan.

Markets are unpredictable

In 2011 many economists were still describing the downturn as the worst since the Great Depression. Retirement accounts that had been sold as low risk lost a large part of their value in 2008, and people close to retirement had little time to wait for a recovery.

Even gold, the traditional safe store of value, has not always been safe to hold. From 1933, when an executive order required Americans to turn in most gold coins, bullion and certificates, until the end of 1974, private ownership of gold bullion in the United States was largely prohibited, with exceptions for jewelry, collectors’ coins and industrial use. Rules that changed once can change again.

How to build economic redundancy

The pattern is the same as with any prep. Depending on one source, whether for water, fire, heat, food or income, is a gamble. Here are four ways to add backups.

1. Sell value, not hours

An employee is paid a fraction of the value they produce. A consultant whose firm bills clients $250 an hour might see a small share of that, with the rest covering overhead and profit for others. That is the normal deal of employment, but it caps what hours of work can earn.

The shift is to think of income as payment for value delivered rather than time spent. Whatever skill earns a salary now, ask whether it could be offered directly to the people who benefit from it, as a freelancer, contractor or small business. That usually takes up-front time and some capital, and it carries risk, so it is often best started on the side while the job is still there.

2. Add streams of income

A second stream can be a part-time job, consulting work, or a small home-based business. The internet has made it far easier to reach buyers anywhere. Common models include:

• Reselling. Buying low and selling higher, from yard sales, closeouts or wholesalers, through online marketplaces such as eBay, Craigslist and Amazon. The catch is that the seller handles storage, shipping and inventory, which eat time and money as volume grows.
• Dropshipping. The seller lists products and takes orders, and a supplier ships directly to the customer. The profit is the gap between the retail price and the supplier’s price. There is no stock to buy up front, but the seller still manages orders, customer service and refunds, and margins are often thin.
• Affiliate marketing. Anyone with a website or a following on social media can recommend products and earn a commission on sales made through their links. There is no fulfillment to manage. Federal Trade Commission rules require the affiliate relationship to be disclosed clearly to readers.
• Selling things you make. Handmade jewelry, soap, woodwork and clothing sell well through craft marketplaces such as Etsy.
• Selling what you know. People earn money teaching carpentry, drywall, gardening, sewing, painting, parenting and a hundred other subjects, through books, e-books, video courses and workshops. A subject you care about is easier to keep working at after a full day’s job.

Be wary of paid programs that promise to teach online business for a large fee. Plenty are sound; plenty are mostly selling the dream. Look for refund terms, verifiable results and people who have actually used them.

3. Build systems that earn without you

There are only so many hours in a day, and a household that simply takes on more part-time jobs soon runs out of them. The long-term goal is income that does not depend on hours worked: a business with staff or processes that run without the owner, rental property, dividends from investments, or royalties from books, music or patents.

These take years to build, and some that promise passive income do not deliver it. Multi-level marketing is the common example. The Federal Trade Commission’s consumer guidance on multi-level marketing notes that most people who join make little or no money and some lose money, and that plans which pay mainly for recruiting rather than for retail sales can be illegal pyramid schemes. Read it before signing up for anything.

4. Spread savings across different kinds of assets

Diversification means more than holding several funds inside one retirement account, since funds of the same kind tend to fall together. It means spreading wealth across different asset classes: stocks, bonds, cash and short-term Treasury bills, real estate, and commodities such as precious metals. Each behaves differently when conditions change.

Before any of that comes the plainest redundancy of all: an emergency fund in cash, commonly suggested at three to six months of essential expenses, kept somewhere safe and easy to reach.

Preparedness-minded households often add a small store of practical goods that hold their usefulness in any economy and can be traded if needed: seeds, fuel, salt, sugar, tools and hygiene supplies. That is not a substitute for savings, but it is a hedge that also feeds and warms the household.

None of this is personal financial advice. The right mix depends on income, debt, age and goals, and a qualified, fee-only adviser can help with the specifics.

Where to start

Pick one layer and start this month. Open a separate savings account and set up an automatic transfer, however small. List the skills that people already ask you for help with and price one of them. Look at where your savings sit and ask what happens to them if one thing goes wrong.