3 Reasons to Favor Recurring Income Over One-Time Income
It is almost always best to favor recurring, long-term income over one-time, short-term income.
This is one of the best pieces of advice that I’ve ever received in regards to financial freedom. Both a college business professor of mine and a former boss gave me this advice. They were both very successful business owners and thankfully the advice stuck with me.
There is a place and a time for one-time, short-term income…but it is limited.
Short-term, one-time income usually pays higher now, but little to nothing later. Long-term, recurring income usually pays much less now but exponentially more down the road through the power of compounding. We all require a minimal level of income to provide the necessities of life in the short-term. It’s how soon we are able to focus on creating recurring income that magnifies its benefits to us and others.
Why recurring income is superior:
1) Focusing on recurring income means that you don’t need to continually “hunt” for new customers, clients, products for resale, etc.
Instead, you are able to focus on taking care of, and serving, your current clients and/or investments. The interesting thing about this focus on service to what or who is currently paying you on a recurring basis is that by providing better service over time, new opportunities, investments, and clients naturally show up. Instead of hunting for your next meal, the meal begins showing up on your doorstep.
2) Focusing on recurring income allows you to ebb and flow your work activity with the seasons of life more easily.
Things happen in life. You have a kid. Your health, or a family member’s health changes. You have to switch industries, specialties, or employment in some way. You have the need to dial back your work to rest and recuperate. Whatever the reason, we all have things that happen in life that require more of our attention from time to time. Focusing on creating recurring income streams allows you to weather these storms and adjust your lifestyle much better. It allows you to take the peddle off the gas at a time when your family really needs you and then dial it back up when the season of life changes.
3) Recurring income is the most “systems-friendly” income.
This is a not-so-obvious benefit of recurring income but a very important one. Recurring income provides predictability of cashflow, allowing for a greater focus on your current investments or clients (see reason 1). This, in turn, provides you with greater time to put solid systems in place to increase the value to you, and to those you serve. The ability to create systems that are managed by you, technology, or others is key to increasing the value of your TRUE hourly wage over time (see this post on why you need to know your TRUE hourly wage). Systems and processes are vital to the growth of the value you create and provide in the limited time you have.
How much of your income is recurring?
For most people, their job is their main source of income. And I would argue that this is mostly short-term, one-time income since you are required to show up again and again to receive the income. Of course, not all recurring income is completely passive. You can focus on building your business, for example, on a recurring income client model but you are still required to do the work of managing the business. However, this provides you with the benefits outlined above as opposed to a simple paycheck from an employer.
You need to ask yourself how much of your income is recurring. How much of it is systematized? If you had to step away or scale way back from your work for a month due to a family emergency would your systems and income sources be unaffected?
An Easy step to begin prioritizing recurring income.
Simply shifting your thinking to evaluate your income sources now, and in the future, as to whether they are one-time or recurring will have a profound impact on how you prioritize your income-creation activities in the future.
A business owner has quite a bit of flexibility here. As a business owner, you can actually transform your business model over time to focus more and more on clients or products that provide recurring income. (see this post for more details)
However, perhaps the simplest way to move yourself in the right direction, regardless of owning your own business or not, is to begin converting portions of the one-time income you receive (e.g. your job, the sale of something, etc.) into long-term, recurring income. This can be done by simply investing a portion of your one-time income into long-term investments. Over time, by increasing the portions of your one-time income that are invested, you will reduce the amount of your income that is one-time and increase the amount of your income that is recurring. This also does wonders to increase your TRUE hourly wage over time. (see this post on a habit that I use to do this)
I wish you all the best as you strive to provide greater value with your limited time.
Kyle Mast, CFP®