Recently, I was filling out an application for a mortgage preapproval (I’m looking to buy my first house and eventual rental property). One of the application questions was “Please list your sources of income.” The question asked me to list sourceS (emphasis on the S) of income, and it had multiple (though optional) lines for my response.
This simple question led me to a dramatic realization: my income is a single point of failure.
Single Points of Failure (or SPOF)
As an engineer, I tend to spend a lot of time thinking about single points of failures (SPOF). More importantly, I think about how to eliminate them.
What is a single point of failure, you might ask? A SPOF is a part of a system which, if it fails, will stop your entire system. It’s a vulnerability in your system.
Engineers spend lots of time identifying and eliminating SPOFs. Typically they do this by introducing redundancy, which are additional components in case of failure of other components. Engineers will often analyze whether SPOFs are worth preventing, usually after a risk analysis. If they decide to accept the SPOF, they recognize that they are accepting the risk and its consequences. This may be done if the likelihood is small and the consequence is also small. You wouldn’t want any SPOFs in safety systems. That’s why there’s typically multiple safety features in every process—this is the concept of redundancy.
An example of a SPOF would be a pump that, if it broke, would shut down the entire process. An engineer may eliminate this SPOF and introduce redundancy by purchasing a backup pump and installing it in parallel.
I’m guessing you identify and eliminate SPOFs from your life on a daily basis without thinking about it. For example, if you have a spare tire in your car, you’re eliminating the SPOF of your car tires. If a tire went flat and you had no spare tire, your entire system (your car) would be shut down. If you back up files on your computer, you are eliminating the SPOF of your file location. If your computer broke and you didn’t have your files backed up, you would lose all of your files. It’s a pretty natural tendency for humans to attempt to eliminate SPOFs.
My Current Source
s of Income
As I filled out the mortgage application, I realized I could list only one source of income: my W2 engineering job. I recognized this as a huge vulnerability and single point of failure. If I lost my job, I have no income. For someone who always has backup plans, this was a major oversight.
For some reason I think our society treats having one source of income as the standard. Either people accept the risk of losing their job because they don’t want to find additional sources of income, or they just don’t think it will happen to them. Or maybe they don’t think there’s any other option.
I think people’s lives would change for the better if our society normalized or encouraged the pursuit of multiple sources of income.
First Line of Defense: The Emergency Fund
I’ve discussed the importance of emergency funds in other articles. Essentially, the purpose of an emergency fund is to lessen a single point of failure in your finances. If you live paycheck to paycheck, and suddenly an unexpected expense arose, your whole system would fail. You’d have to put the unexpected expense on your credit card, and you’d have a hard time finding the money to pay it off next month. Or if you lost your job, you wouldn’t be able to pay for your basic living expenses the following month.
That’s like having critical files saved on your desktop without backing them up. It’s destined to fail sooner or later.
Even if you spend less than you earn, but you’re putting the entire balance in retirement accounts, you’ll be in almost the same situation. If you had an emergency expense, or lost your job, you wouldn’t be able to access that retirement money without taking significant penalties.
That’s why an emergency fund is so necessary, and it’s important to have one even before starting to invest. It’s a form of redundancy to guard against the SPOF of having one source of income. If you have an unexpected expense, or lose your job, you have 3-12 months of living expenses in an easily accessible place.
Eliminating My Income SPOF
While an emergency fund is certainly a good defense against the SPOF of one income source, I personally want to have more lines of defenses.
The more redundancy you have in your system, the more protected you’ll be in case of multiple failures. What if I lose my job and have hefty emergency expenses at the same time?
Personally, I don’t want to rely on one source of income because I want more options. If I lost my job, I’d have the option to wait awhile to find the next perfect job, or I could build my own business, or use that time to build up one of my other sources of income. Or, if I suddenly got a terrible manager who made my work life unbearable, I want the option to leave. Multiple sources of income and financial independence go hand in hand—they give you options and they give you freedom.
Ideally, I would like 3 sources of income beyond my emergency fund. I already have my job as an engineer. I plan to start investing in real estate, which can be a good source of passive income. Finally, I would like to start a side hustle and eventually maybe own a business. I’m not quite sure what that looks like yet. This blog may bring in some money at some point, although I would expect that to take a few years (if it happens at all). Maybe I would tutor or create courses. I also continually save money and watch local businesses for sale so that someday I can be in a position to act on an opportunity.
The ultimate sources of income are passive, which means you’re not trading your time for money. Owning real estate may not be completely passive, but to me it qualifies because I would spend substantially less time managing properties than I do at my 40-hour job to make the same income. I’d like to have multiple passive (or semi-passive) sources of income rather than one full-time SPOF.
While I still have yet to develop my other sources of income, I at least have built my emergency fund. I have identified the single point of failure in my financial system and I am actively searching for ways to mitigate it. I will keep you updated on my progress, and I’d love to hear your accomplishments or ideas for eliminating an income SPOF!