When people ask me if I make a living from music, my answer is always, "define living."
Having said that, my only source of income is from music, and for me the key has been diversifying. Most of my steady income these days is from teaching. I teach private lessons out of my home (extremely low overhead and very satisfying). I have developed a bunch of workshops I can teach. So sometimes when I'm performing a concert I can also offer a workshop on guitar, singing, performance, or songwriting in the same town the afternoon before or the day after before I leave town. That helps me bring in more income for the same amount of travel.
I also teach classes at an arts school every summer now, and teach at several music camps. I have recently started teaching guitar lessons on an online website. And I've just started offering long distance lessons via Skype, so now I can teach guitar to someone halfway around the world if I want.
I love teaching and it adds immeasurably to my musicianship. I can (for the most part) set my own hours, and move my schedule around if I need to. My students become great supporters and fans, bringing their friends to gigs and buying CDs to give other people as gifts, and so on.
Recently I've also started looking into working with kids. I am currently taking a course for artists in different disciplines who want to work in schools. I'm learning about the learning culture in schools, developing programs that fit the curriculum, working with teachers, what's appropriate for different ages, multiple intelligences, and all kinds of great stuff that will hopefully prepare me to be able to bring my music into schools in a meaningful way.
I am also learning how to play the ukulele, because I love the instrument, but also because I see a lot of potential for working with kids - the uke is small, easy to get started on, portable, and incredibly versatile. All of which make it ideal instrument for kids.
All of this is in addition to my performing and recording activities, which I originally thought would be my main sources of income. I learned fast that I would have to find other ways of using my music if I wanted to be able to survive. Doing lots of other things with my music has helped me stay interested in what I'm doing, introduced me to new audiences, and helped me develop as a musician. So all in all, I think it's been a great thing for me. Your mileage may vary, of course!