7 Types of Passive Income
7 Streams of Income: Your Path to Becoming A Millionaire
Have you ever heard or read somewhere that the average millionaire has 7 streams of income? It’s one of the more common statements when it comes to accumulating wealth and how wealthy individuals reached this status.
But how true is this?
Well, author Tom Corley did a five-year-long study and surveyed wealthy individuals on their daily habits, and then compared them with lower-earning individuals. He even wrote numerous articles for major publications and even a book called Rich Habits.
Enjoy Life Without Emptying Your Wallet
What he discovered and learned is that most self-made millionaires generated their income from multiple sources. The breakdown ended up being:
65% had three streams of income
45% had four streams of income
29% had five or more streams of income
So what are the common 7 streams of income and how can you start creating multiple sources this year?
Extra: If you are looking for more around this topic, definitely check out another in-depth study published by the IRS.
Passive And Active Income Streams
When you begin exploring the 7 income streams, you’ll find that these will follow into two types, active and passive. Both are valuable ways to make money, but each is a bit different.
Active income is where you work for someone or provide specific services and you are paid for that work. This could be your job, if you are consulting for a company, or own a business where customers pay you.
Passive income is where you are generating income without necessarily always doing work. This income stream still requires some upfront work to generate revenue, but over time it will require less effort on your part to get paid.
Examples of passive income include an online ecommerce store, a digital book, or some other online product. Over time, you start to make money even when you are not physically working on the product.
What Are The 7 Streams of Income?
- Earned Income
Otherwise known as your salary or typical monthly income from your primary job. Earned income could be based on an hourly rate alongside bonuses, commissions and more. This remains the same whether you are employed or self-employed. This earned income is typically subject to taxes, although likely at different thresholds depending on the amount.
- Business Income
Alongside earned income, you may receive extra income from businesses you have set up. These are otherwise known as your side hustles, and may be made up from just one source or could be multiple.
It is typically found among your balance sheets, taking the difference between profit and loss. Once again, this is subject to taxes.
- Interest Income
You’ll receive interest on your bank account savings, although since 2020 this interest rate has likely fallen significantly. Ideally, it would match the level of inflation but these days, interest rates are very low.
Find out your interest rate by checking your bank statements. If you have funded any loans, you are also likely to be eligible for interest as the principal amount is repaid.
Some banks with interest rates include CIT Bank, Aspiration, and Consumers Credit Union.
- Dividend Income
The stocks and shares you invest in may yield dividends, or you be paid via dividend if it fits with your company structure. Dividends are more commonly known as a share of the profits.
For example, as the Director of an LLC, you are eligible to split your profits into twelve monthly dividend payments. Alternatively, some investments pay dividends quarterly or annually.
- Rental Income
Once you own property, you can begin collecting rental income as an added monthly income stream. Depending on the structure of your property (whether you’ve got it under a separate company, for example), you may be subject to extra taxes, so the yield of your property income should account for this.
As a landlord, you’ll likely have a Mortgage to pay as you acquire new properties. This should also factor into your rental income pot.
- Capital Gains
Capital Gains income is acquired through the sale of assets such as art, stocks, business, and loans. Income earned via this route is subject to capital gains tax but will often be acquired as a lump sum rather than consistently over time. Learn more about capital gains tax on the IRS website.
- Royalties or Licensing Income
Are you a creative individual who produces music or photography content? Licensing this for specified public usage means you can create royalties as an extra stream of income.
Royalties are not likely to be significant on their own, but mass production/usage of your content is likely to bring in a steady stream.
The Benefits of Having 7 Income Streams
Multiple streams of income reduce reliance on one source
This means that even if one route dries up, your income is spread through so many sources that it should not have a significant impact on your finances. For example, if your tenant can’t afford to pay rent for 1 month.
This Helps you stop living paycheck to paycheck. Building multiple income sources means you can have money coming in all the time. Instead of relying on your income from one month to the next, you can accelerate your budget and savings plans in order to reach financial independence.
Passive income can reduce your working hours. When you are no longer dependent on putting in more hours for more pay, you can spend time genuinely and on what you want. This ultimately means more time for family, friends, and your favorite hobbies, while your earning potential is unharmed.
You have the chance to turn your side hustle into a concrete business
Have you ever noticed that most entrepreneurs have experience with more than one business? It’s because they have the financial stability that provides time to explore other options. It means many of them follow their passions in order to solve real-world problems.
Tips on Building Millionaire Income Streams
Maximize your salary and career
- Ask for a raise when you can and ensure you take every promotion opportunity seriously. If you’ve hit the glass ceiling at your current workplace, try looking for lateral positions in order to gradually move upwards elsewhere.
Keep your expenses low
- Many of us are trying to find the balance between low expenses and a luxury lifestyle. But try to stop your impulse spending and only buy the “wants” within your financial plans. By keeping your expenses low, you’ll have more leftover cash to invest with and let that money compound over the coming years.
Invest in stocks
- With an average return of between 6-8%, the returns you’ll get on the stock market are likely to be far higher than any interest savings account. While any investment is a risk, you can choose your investment style that suits your needs.
Lazy investing via index funds, maybe use the three-fund portfolio.
- Investing in individual stocks. You can utilize stock picking services to help you with your research and portfolio. Managed portfolios that are handled by robo-advisors for more automated investing.
Invest in real estate
- If you can afford the high upfront cost of putting a downpayment on multiple houses, this is a great way to diversify. With over 43 million units occupied by renters in the U.S., there is a high demand for property. Plus, this is the residual income that enters your bank account every single month for as long as the property is occupied. While you’ll have other costs, such as maintenance, this should be relatively low in comparison. Additionally, you can invest in real estate through crowdfunding platforms like Fundrise, DiversyFund, or Groundfloor. You can earn dividends and interest payouts on your investments without managing a single property.
Build passive income
- Creating digital products, ebooks or guides can be time-intensive at the beginning. But, once made, these can be good to go without touch-ups or improvement for years to come. These income-producing assets mean you can be earning money while you sleep, and can bring in thousands of extra revenue for as long as they are available.
Start a side business to scale
- This might start out as passive income, become your new job, and even eventually be acquired by another entity. For example, if you can start and scale an online blog, you’ll start making money from ad networks and sponsored posts. Plus, if you then look to sell it with over 100k site visitors per month and consistent recurring revenue; you’re likely to fetch a high price. If you want to test the waters first, try some gig economy jobs or figure out what you can do to make extra money. Even something simple like flipping books or thrift store flipping can eventually become passive.
Pace yourself when you start
The idea of having multiple streams of income is exciting, especially when you think about the possibilities and the timelines of increasing your wealth.
But you want to approach your income streams methodically and with patience. Otherwise, you might overwhelm yourself and get frustrated when things don’t go your way.
Not everything happens overnight and there can be tons of work or education needed for you to succeed. Some of your income streams will fail too and that’s okay. Some income ideas will be winners from day one and others won’t, just keep your emotions in check and keep going!
Do You Need 7 Streams of Income to Become a Millionaire?
Does every millionaire have 7 streams of income? No! Some will have less and others will have plenty more. Your goal should to never be reliant on one stream of income and find ways to diversify where your money comes from currently.
This allows you to become independently wealthy and ensures if one stream were to become volatile or crash, you have others to pick up the slack. Only you can determine the different types of income streams you want to build and how far you want to take your wealth.