You’ve probably heard that the average millionaire has 7 different income streams. Yes, seven!
While that may seem like a lot, you’ll understand why there are so many. And, more importantly, why you need to begin with just one.
Also, most of the seven will often grow from one main income stream which will be your “bread and butter”.
But, these other sources will be just as important because they’ll allow you to earn passive income.
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Active vs. Passive Income: What’s the Difference?
Before getting into the different types of income streams, I thought it would be useful to explain two kinds of income that you’ll likely be making in your lifetime. These are active and passive income.
- Active income is the earnings you receive for work you do. In most cases, this will come from your wages if you’re working for someone. Or, your earnings if you run your own business. The key word here is ACTIVE, which means that you need to work in order to earn it. And, the moment you stop working, the pay, checks, or earnings stop coming in as well.
- Passive income is earnings that aren’t directly affected by work. That is, it allows you to earn extra money even if you don’t clock in or clock out regularly. Among the most popular types of passive income include interest and dividend income. In both cases, your money keeps earning interest or dividends without you having to work on something day in and day out.
Besides the difference in how they’re made, it’s important to note that passive income often needs active income to work. That’s because you need to invest your active income to make passive income.
For example, interest earnings come from money you set aside to the bank or other financial instruments to earn extra money. Similarly, dividend earnings come from stock investments.
Just as importantly, in most cases, passive income is much smaller than active income. This is why most people get to earn more passive income later in life when they’ve been able to accumulate money from their active incomes.
Again, taking the example of interest and dividend earnings. Both are much smaller in terms of the amount you receive compared to the paycheck you get from work.
Finally, it’s likewise important that passive income doesn’t always mean you don’t have to do anything. Instead, a better way of looking at it is that the earnings you get from passive income doesn’t necessarily correlate with the number of hours worked (which is the case with most active income).
One good example of this is rental income. Rental income is a good source of passive income. But it does entail some work on your part including collecting the rent money, upkeep, and maintenance of the property.
Similarly, owning a franchise, be it a car, food or retail establishment is another great way to earn passive income, especially if the company you franchise is well established. Say you get one or more franchise outlets of McDonald’s, Shake Shack, or In-N-Out. They’ll train personnel and managers so you don’t have to do the work yourself. But, you do need to check in from time to time to see if the managers are hitting their performance goals.
How Do You Accumulate Wealth?
The next step to understanding income and wealth is knowing how to accumulate wealth. Unless you win the Mega Millions, have a trust fund or inherit a large amount of money from a relative, you’re likely going to have to gradually accumulate wealth.
Whether it’s Bill Gates, Elon Musk, Warren Buffett or Steve Jobs, they all found a way to accumulate their wealth. None of them got “lucky” by suddenly striking it rich by winning the lotto or inheriting tons of cash from their parents.
And that means you can too.
Often that means following these simple steps.
- Step 1: Make Money. When you start from scratch, your time, skills and labor are your biggest assets. That’s because you use them to earn money.
- Step 2: Save Money. From the money you make from your active income in step 1, you’ll want to save a portion of that. It is these savings that become your first step to accumulating wealth.
- Step 3: Limit Your Expenses. If you make tons of money, then limiting your expenses is less of a problem. But, if you’re everyone else who makes regular daily wages, then limiting your expenses goes a long way in increasing your savings.
- Step 4: Investing your savings. The savings you keep from steps 2 & 3 ultimately reward your hard work as you’ll be able to invest your hard-earned money into passive income. This gives you the ability to augment your active income without doing a lot of work. This way, you can keep doing step 1 and bring in extra cash from your investments.
7 Income Streams of Millionaires
So what are the 7 income streams of millionaires?
Before getting into them, it’s important to understand that streams mean sources. As such, these are sources of income.
And while it’s true that most millionaires will need a combination of these streams, it’s not always necessary. Just importantly, depending on what you’re working on and where your skill set lies, you may be better at one income stream than another. Thus, your list of income streams will be different from other people. So, don’t worry if you’re missing one or two. Or, that your list looks completely different from someone else’s.
That said, it’s important to start with one and get good at it. That’s because the money you make from that one stream will often be the one to supply the cash for the others, especially the more passive ones.
For example, Mark Zuckerberg needed only one income stream to become a multi-billionaire. The rest of his income streams all stem from his Facebook money. That’s what allows him to invest in other things that produce passive income.
The same is true for Bill Gates and even the late great Steve Jobs. Both of whom made their first million (even billion) with their business, Microsoft and Apple, respectively.
So, don’t worry if you don’t have all 7 streams. Here, as Gates, Jobs and Zuckerberg have shown, quality wins over quantity.
Here are the 7 income streams of millionaires.
1. Earned Income
Earned income is money that you make from your job or salary from side hustles and other means of making extra cash. Among the different income streams, this and profit income are the most laborious. They take up your time and you have to figure out how to earn a consistent living from them.
Although, earned income is the more common path most people take. That’s because most of us, including the will-be successful entrepreneurs later on, often start by working for someone else.
That said, earned income like all the other steams has its pros and cons. If you’re lucky enough to get paid in the 6-figure range or higher, then you’ll be able to make a good living from it and just use the other income streams to supplement it.
But for most of us who earn an average income from our jobs, it can help and hinder. It helps by giving us the ability to save and make extra money from the other income streams. But, it can also give you a false sense of security or comfort, one that prevents you from striking out on your own when there’s an opportunity for bigger growth.
2. Profit Income
Profit income is money you earn from selling something at a price higher than you acquired it. On a small scale this could be a few products like yoga mats for example (if you’re in the fitness business).
On a larger scale, it could be an entire car or house you flipped after restoring or upgrading. And, in some cases, it could be an entire business you created from scratch or bought at a lower price.
Either way, like earned income, profit income requires work on your part. But, in addition to your time, skill, and effort, you need to invest the money as well.
If you’re running a retail store, this would mean inventory. If you sell a car, home, or business, you’d need to invest in that vehicle, property, or the business, respectively as well.
So, there’s more risk in trying to earn profit income as opposed to earned income, which is why most of us often start with earned income right out of school. It’s a way where you can earn money from your skill. And, not have to shell out any cash, which most of us don’t have at that time.
The upside of profit income is that if you’re able to do it right, the rewards far exceed that of earned income majority of the time. You’ll be able to earn more from it and often enough, you get to set your own schedule and work for yourself.
3. Interest Income
Interest income is money you earn from lending cash in return for the “time value of money”. That’s because interest is basically that, other people paying you an extra amount for being able to use your money.
In most cases, you’ll be earning interest income from the bank. This could be from high yield savings accounts or time deposits. It could also be by lending your money to the government via Treasury Bills and Notes. Or, if you have more money to set aside and a bigger appetite for risk, corporate lending like bonds, which pay a lot better than banks or the government.
The best thing about interest income is you don’t need to do anything to keep earning it. Although the returns on any given year are smaller than profit and earned income, interest income snowballs due to compounding. So, it’s a good idea to keep earning interest in 30-50 years to get the most out of it.
The second benefit of interest income is it allows you to put your savings into something that earns you extra money with little to no risk (and no extra work).
4. Dividend Income
Dividend income is much like interest income. Although, it’s less certain. That’s because it’s in the company’s prerogative to give out dividends (or not) for any given year.
That said, there are some companies that are very consistent in doing so. As such, if you want to earn consistent dividend income, it’s important to choose companies that are known to do so.
The other main difference between dividend and interest income is that dividend income requires you to invest in the stock of a company. The reason being that you can only earn dividends if you’re a shareholder of a given company.
The upside or downside to that is risk. Since the stock price of a company can go up or down, the principal amount (the amount you invested to buy the shares of the company) can increase or decrease. The uncertainty increases the risk of dividend income compared to interest income which is a “sure thing”.
5. Rental Income
Rental income is earnings you make from an asset you have. The most common of this is renting your house, property, or building. But, it can pretty much be anything.
You can rent your car or something you own. You’ve probably also seen stores that rent shoes, limos, and tuxedos.
Rental income like dividends and interest income are very passive in nature. In a way, rental income is very much like interest income in that you lend something to others in exchange for a fee. With interest income that’s your savings. With rental income, it’s an asset you own.
The downside of rental income is the value of the asset. In this manner, it’s like dividend income. While you can earn from it, the value of your asset can fluctuate upwards or downwards. But, unlike stocks that you can sell in the stock market fairly quickly, assets are often more illiquid. That is, they’re not as easy to turn in to quick cash.
For example, it takes at least a few weeks to a few years to sell a home or property. Basically, the larger and more expensive an asset, the harder it is to “move”.
6. Capital Gains
Capital gains is money you earn when the price of an asset you earn goes up. We’ve already touched on this a little bit in both the dividend and rental income, both of which allow you to earn extra money by investing in some kind of asset.
In the dividend income, the asset in question is your stocks or shares in the company. While you can earn dividend income from them, you can also earn more if the price of the stock goes up.
This is your capital gains. That is, you earn on the capital (original amount) you invested.
Similarly, with rental income, you earn capital gains when the price of your property or home goes up.
7. Royalties / Patents
Finally, there are royalties and earnings from patents, trademarks, and other intellectual properties. Here, you earn money by allowing others to use something you created or invented.
One popular example is how actors and actresses keep earning money from reruns. For example, the cast of popular sitcoms like “Friends” and “Seinfeld” continue to earn royalties as long as networks keep running their reruns. Similarly, musicians earn money each time someone plays a song they originally sang or wrote.
If you’re a sports fan, you’ve probably heard the booming phrase “Let’s Get Ready to Rumble”. That phrase was originally said by boxing ring announcer Michael Buffer. But, it became so popular that he trademarked it. And, the royalties that have allowed him to have a net worth of $400 million.
Another example of this is patent income. If you’re smart enough or lucky enough to patent or trademark something that can earn you money while doing money. That’s a good deal.
I have a friend who’s uncle is literally a rocket scientist. He’s retired now. But back in the day, NASA recruited him to create a whole bunch of technology for their rockets and the Space Shuttle to go into orbit.
All his inventions and the tech he innovated were patented under his name. So, till today after he’s retired, NASA and other companies that use any of his many technology patents pay him over $1 million a year (for doing nothing). Now that’s what I call a retirement.
On the business front, store creators franchise their creations to others for a fee. That’s how many fast-food chains grow so quickly without the owner having to invest their own money to create more stores.
Knowing the seven income streams of millionaires allows you to expand your earning sources once you have extra savings on hand. They give you different options that allow you to grow your cash instead of letting it just sit in your savings account.