What are the income streams that wealthy people have?
Studying millionaires is very interesting because they are typically average people with extraordinary focus and discipline.
People who are extremely wealthy achieve this status by working otherwise than the average person—not necessarily harder or smarter. The fact that millionaires typically have multiple sources of income is an intriguing insight into their lifestyle.
The following fascinating characteristic of millionaires was highlighted in a 2018 article on CNBC:
- 65% of millionaires have three income streams
- 45% of millionaires have four income streams
- 29% of millionaires have five or more income streams.
The majority of people have at least one job as a source of income. They report to work during the week, and after a certain number of days, they are paid.
However, three different sources of income make up the majority of millionaires’ incomes. That includes work and at least two additional responsibilities for some people. For some people, labor may not even be considered.
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Active Income vs. Passive Income
Income comes in two forms: active and passive.
When you work and are paid for it, you have active income. You get paid for the hours you put in at McDonald’s. Even though you might not punch in and out of an office job, you will still be paid for the work that you complete. You won’t get paid if you do nothing.
When the payment isn’t directly related to doing work, it’s called passive income. The two most common forms of passive income are interest and dividends.
Most passive income sources involve active work up front for which you are paid a small amount, and the majority of the income is received later.
Don’t confuse passive income with worklessness. It is a typical misconception about passive income.
Even though you’re not directly linked to your pay by the number of hours you put in, you’re still working. Rental property ownership is considered passive income, but there is a significant amount of work involved.
Although the work is front-heavy, if you’re lucky, you may be able to collect rent checks without incident for several months before you have to go to work.
How Can You Build Your Wealth?
The next puzzle piece is right here.
The secret to building wealth is simple:
- Get paid by selling your time,
- Spending less than you make
- Put your savings into investments so they can grow passively.
All done. A straightforward input-output issue exists. And it’s what distinguishes the wealthy from the rich.
The only limitation on the entire system is the amount of time you have left in this world.
There are only 2.21 billion heartbeats in you. That is just over 70 years at 60 beats per minute. Every beat counts.
Another restriction known as Maslow’s Hierarchy of Needs exists, and this is where some wealth inequality manifests itself.
You must eat. You require a place to rest. And both of those needs, as well as others, call for money.
In a perfect world, you could take your time to build a hugely successful business or perhaps go through a few failures before the huge success.
However, in the real world, you need to get a job that will pay you right away so you can take care of your basic needs, such as food, clothing, and a place to sleep.
Priority One: Increase Active Income
If you don’t have any other resources, you should first concentrate on active sources of income (your job) until you’ve saved enough to establish passive resources.
There are two ways of thinking about the concept of saving money:
- Save more money – This school emphasizes being “frugal” and keeping expenses to a minimum.
- Earn more money – This school places a strong emphasis on enhancing your income through side jobs, businesses, etc.
It’s a false dichotomy. You can and ought to combine the two.
Expense reduction is immediate, just like active income is, whereas increasing income is frequently a long-term strategy, like creating passive income sources. So, while developing your passive sources, you cut what you can now to secure immediate savings.
One cannot overstate the value of saving money, particularly early in life.
You are compelled to work when you begin with nothing, or nearly nothing. You can turn your savings into a passive source of income. You will remain in that stage indefinitely if you don’t save that active income through your own decisions or decisions that are imposed on you.
Long-term capital gains and qualified dividends are just two examples of the passive income sources that benefit greatly from tax treatment.
You might not owe any taxes on capital gains if you’re in a low tax bracket. It’s only 15% if you are in a high tax bracket, which is much lower than regular income tax rates.
Priority Two: Grow Your Passive Income
Every passive stream can be divided into one of two groups:
- You create an asset (a business) that adds value and then you take a cut of that value.
- Lend money to someone to help them build something valuable, and then they pay you.
You need savings in both scenarios.
Building a business means forgoing current active income in exchange for potential active and passive income.
You’ll need a means of funding your expenses while waiting. You might be maintaining your day job while building a side business, or you might be surviving off of your savings. You need a cushion either way.
When you lend money, you are giving a portion of your savings to someone who will work hard to make it grow.
All of those potential passive income streams for the future depend on having savings.
7 Income Streams That Wealthy People Have
1. Earned Income
One of the millionaires’ primary sources of income that most people are familiar with is earned income. Your job is where you get earned income. It is one of the income streams that wealthy people have.
The majority of people make a HUGE error by depending solely on earned income to support themselves. Time from your life is being exchanged for money. Working more hours is a response to increased financial need. There is a limitation to how much work you can accomplish because everyone has the same 24 hours in a day.
This means that if you already have a job but want to increase your income, you can either look for a position that pays more per hour or take on a second or third one. This might entail working on the weekends or overnight.
The issue with this is that you keep exchanging more of your time for money. Your objective should be to exchange your time for more money. Earn $25 per hour while working the same number of hours as before as opposed to earning $13 per hour.
The Best Ways To Boost Your Earned Income
Use your brain instead of your braun if you want to increase your earned income like the wealthy do. You can do this, for instance, by expanding your knowledge and skills.
What qualifications would you need to work as a manager or assistant manager if you were forced to take a job paying the minimum wage? Find free business training opportunities or a mentor in business who can teach you the ropes.
Your hourly wage can rise by $10 or more simply by transitioning from a store employee to a manager. Even though you continue to put in the same amount of hours, your pay is significantly higher.
How To Earn More Money While Working Less
The 24 hours a day are the same for everyone. Develop a specialized skill if you want to escape the mindset of exchanging your life hours for money.
The highest-paid people are often those who are experts in their field. They are able to work much less because they can make hundreds of dollars per hour. You might be surprised to learn that this is true even if you don’t have a PhD or are a well-known expert in your field.
There are now a ton of online careers available thanks to the internet. Since they are completely out of the way, fancy education is not necessary. What matters are your performance and outcomes.
Taking on the role of social media manager is one example of this. In the past, you had to have a degree in communications to be hired as a full-time employee by the company.
Without a degree, you can now easily launch your own freelance social media management company. Successful specialists can make $200 or more per hour. Check out these stay-at-home jobs if you need more inspiration.
2. Interest Payments
Interest payment is one of the income streams that wealthy people have. The money you make from lending your own money to another person is known as interest income.
With a bank account, money market account, Treasury Bills, Certificates of Deposit (CDs), and many other options, you can earn interest.
Interest-bearing investments are identical to the fees levied by credit card companies or the interest you pay on a mortgage. You get paid a small percentage of the money you lend to others for short-term borrowing.
Since your bank is FDIC insured, earning interest from them carries no risk. You will receive your money back if the bank loses it due to a poor investment decision because the federal government insures it.
If you sell a business and agree to have the buyer pay you back in interest-bearing installments over time, you can also earn interest in that situation. You won’t receive all of the proceeds from the business you sold right away if you do this, but if you think the buyer poses little risk, you might decide this kind of scenario is ideal.
You could, for instance, sell your company or a franchise and permit the buyer to pay you the full amount over a five-year period. The buyer would give you the agreed-upon principle amount plus the chosen interest rate percentage each month.
The buyer is in charge of the business during this time, but you would have the right to retake it if they were to default on the loan. Naturally, everything would depend on the agreement you drafted with your attorneys.
Dividends are a type of income that you receive from the shares of a company that you own. Dividend stocks is another name for them. It is one of the income streams that wealthy people have.
As you don’t need to actively buy or sell stocks, this is a passive source of income. In the company in which you own the dividend stock, you are regarded as a shareholder.
If, for example, you owned 100 shares of dividend stock at the end of the year and received $2 in dividend income on each share, you would have had $200. The profits become substantial as you increase the number of shares.
Selecting the ideal dividend stock is crucial, but it’s easier said than done. Additionally, you run the chance of the business failing and your shares losing all of their value. Most dividend stocks have extremely low yields of just 2 to 3 percent; therefore, if you’re young, investing in well-diversified index funds might be a better choice because of their higher growth potential.
As with any investment, ensure that you are fully informed before making a decision and seek advice from a qualified financial professional.
4. Rental Earnings
After deducting the costs of the mortgage, management, and other expenses, your rental income is the amount you receive from your tenants. It is the outcome of you possessing something and leasing it to others.
This may involve commercial real estate renting space to other businesses, or it may involve single-family homes or apartment complexes that are rented out to regular people to live in.
Due to its strength as a source of income, real estate is typically owned in large quantities by millionaires. Land is a limited resource; once it has all been purchased, more won’t be produced.
The wealthy are aware of this and purchase real estate in well-known areas or developing neighbourhoods because those assets appreciate more quickly.
The significant upfront cost of purchasing real estate is one of its biggest disadvantages. You will still need to make a sizeable deposit to the bank even if you receive a loan.
The biggest strength of real estate is also its biggest weakness. In the case of real estate, a bank will frequently lend you the money with just a 10% down payment of $20,000 if you want to purchase a $200,000 house.
You would need to have $200,000 on hand if you wanted to purchase $200,000 worth of stocks. No bank will lend you money to purchase stocks because they believe the risk is too great.
Banks view real estate as a much safer investment than other types of investments because it involves a tangible asset (your home) and a stable housing market.
Because the mortgage must still be paid or the bank will seize your home, it is not less risky for the home buyer if they are unable to find tenants or run into financial difficulties.
Overly leveraged buyers of investment property have high net worths that are a house of cards. It only takes one economic downturn or problem with one of the properties for everything to collapse. Because of this, it’s crucial to avoid taking on more debt than you can afford when investing in real estate.
Why Do Banks Lender You Money For Real Estate But Not Stocks?
Since real estate is thought to be a lower-risk investment than stocks, banks will lend money to people for real estate but not for stocks. Home insurance is something that property owners have, whereas stockholders do not.
Real estate is more secure for banks than stocks because they can force a sale for more money if they need to recoup their costs due to the land’s value and the home’s value.
With stocks, their value is determined by the price at which you purchase them. With real estate, this is not the case. Life events can occasionally cause someone to be in a desperate situation to sell their home. You can buy a property for less than it’s worth if you know how to spot investment real estate.
5. Company Profits
Salaries and business profits are not the same. Your pay for performing your job is determined by your salary. It might be paid hourly or in a fixed annual amount. Business profits are the funds that remain in the company after all other costs have been covered.
Advertising, product sales, and service provision are all methods for making money in business. Every dollar a business makes is added to the total amount of profits it has for the year.
Some business owners choose to put this extra cash back into the company, but they also have the option of keeping it as a bonus. Business owners frequently postpone taking a lump sum profit until after taxes. This money was worked for in order to build a prosperous company.
Instead of raising one’s pay and possibly endangering the company, it is more prudent to maintain one’s salary while rewarding oneself with a bonus from additional profits.
6. Licenses & Royalties
For someone who develops their own products, royalties are a significant passive income source. It is one of the income streams that wealthy people have.
It could be a method or notion that you grant permission to use to third parties in exchange for a fee. You are not permitted to take someone else’s ideas or created items without their permission because they are considered to be their private property. Actually, it’s regarded as theft.
Book authors provide the clearest illustration of this. The publisher receives a license from the book’s author. The book is then formatted, printed, and sold by the publisher. The author receives royalties, which are a portion of the sales proceeds, according to the terms of the book deal they signed.
Even though it might take the author a year or longer to write the book, they will still be able to make money from it for years after it is published. If you have a ton of ideas, can create products, or are able to obtain patents, this is a fantastically lucrative passive income stream.
One of the key differences between rich and poor people in terms of habits is their ability to innovate and create. Wealth-making individuals don’t waste time being conventional.
7. Capital Gains
The money you receive as a result of the rise in value of an asset you’re selling is known as capital gains. It is one of the income streams that wealthy people have.
Capital gain is the amount that is gained when comparing the asset’s sale price to its original cost. Stocks, real estate, bonds, jewelry, coin collections, and automobiles fall under this category.
But capital gains are not the same as investment income. Profits from the sale of an investment for a price above its value are known as capital gains. Capital gains, dividends, interest, and other earned profits are all referred to as investment income.
The most typical methods for making money through capital gains are purchasing real estate at a discount and then reselling it for a profit or purchasing growth stock funds and then selling them when their value has increased.
Before selling off significant assets, be sure to consult your tax advisor because capital gains do have tax ramifications.
Multiple income sources are necessary if you want to increase your net worth. It is dangerous to depend too much on one stream.
Suppose you lose it. What happens? Similar to this, if that one source of income necessitates labor, you are constrained in how much you can earn due to the limited number of hours in a day that you have available for work.
Your net worth can increase greatly by utilizing any of the seven income sources listed above. Consider implementing the above-mentioned income streams to diversify your portfolio if you haven’t already.
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Adam is an internationally recognised author on financial matters, with over 583.2 million answers views on Quora.com and a widely sold book on Amazon and a contributor on Forbes.