Do you know there are 7 streams of income? How many streams are you using to generate money? Which and how many streams do millionaires apply to earn good income?
Earning income as an employee is not the only way to make money. The truth is, if you want to build wealth or achieve your long-term financial goals, you need to diversify your income sources with multiple streams of income.
Many people want the get-rich-quick method. How about we just look for ways to make money from doing several things. Some individuals would say, I am not good at multitasking, I cannot manage just my job, how am I going to generate income from different streams of income? I have written great tips on how to multitask here, but do not overwhelm your self. If you cannot apply it now, you might be able to apply it in the near future. No knowledge is lost.
I am going to share some of the streams that the millionaires use, along with the advantage and disadvantages of each. You may want to work towards new streams
Here are 7 streams of income millionaires use to Earn.
1. Earned Income
This Income is the money that you earn by doing something or by spending your time e.g. the money that you make in your job, the salary you get by working for someone else. Earned income includes the following types of payments:
Wages: They are what an individual receives (before any deductions) for working as someone else’s employee. Wages could include salaries, commissions, bonuses, severance pay, and other special payments received because of employment. They are counted in the month of receipt.
Flexible Health Benefits: The employer can decide to pay flexible health benefits on behalf of the employee which the individual must use this money to purchase health insurance.
Sick Leave: This could be a payment made in place of wages to or for an employee by an employer or a private third party due to sickness or an accident. Sick leave can be classified as earned income if the individual receives it within six months after work stopped because of sickness or disability. Income received six months after work stopped are considered to be unearned income.
Holiday Pay: In the UK, workers are entitled to a week’s pay for each week of statutory leave that they take. This includes full-time, part-time, term-time and casual workers.
Others
- bonuses and commission (including tips)
- Statutory Maternity/Paternity/Adoption Pay
- employer’s maternity pay
- childminding expenses (e.g. childcare vouchers)
- expenses to cover travel to and from work
- other expenses which are not required to enable the client to carry out your job
- money received instead of pay (for example paid by a liquidator)
- money received in lieu of contractual notice or compensation paid for losing a job
- holiday pay for holidays not taken
- retainers
- money paid under the Employment Protection (Consolidation) Act 1978
- payments ordered by an industrial tribunal because the correct period of notice or redundancy has not been given
- payments from employer’s redundancy funds because of liquidation
- earnings from therapeutic work recommended by a doctor while receiving an incapacity benefit.
In the UK, the tax system is based on marginal tax rates. That means it’s worked out as a percentage of income you earn inside certain thresholds, you don’t pay the same amount of tax on everything you earn.
As an employee:
- you pay 0% on earnings up to £12,500* for 2019-20
- then you pay 20% on anything you earn between £12,501 and £50,000
- you’ll pay 40% Income Tax on earnings between £50,001 to £150,000
- if you earn £150,001 and over you pay 45% tax.
For example, if you earn £52,000 a year, you pay:
- nothing on the first £12,500
- 20% (£7,500.00) on the next £37,500
- 40% (£800) on the next £2,000.
You can use GOV.uk’s tool to estimate how much Income Tax and National Insurance you should pay for the current tax year.
Earned income is where your quality of life will suffer the most because you will be trading your time for money and be paying the government a percentage (according to your earnings). You are not working for yourself alone but also for the government.
So why are most individuals centered around this income stream?
This is because earning money through this income stream will provide you with a ‘relatively’ comfortable zone.
Your biggest enemy is the comfort zone; this zone will keep you from leading the extraordinary life you have always dreamt of.
This is the Income stream where you might spend the maximum time of your life and still will not have enough money to live a wealthy life.
Comfort is your biggest trap and coming out of comfort zone your biggest enemy”
2. Profit Income
This can be defined as money you earn by selling something for more than it costs you to make. It can also be defined as the surplus amount left after deducting all the expenses from the revenue. You need to be an entrepreneur, whether at the retail or wholesale level, as distributors or manufacturers to earn profits.
For example, suppose Mr. B purchased some goods for $1000 and paid $40 on account of a carriage and $20 as octroi duty. He sold the goods for $1400.
- Gross profit = Total sales – Cost of goods sold
- Total Sales = 1400
- Cost of goods sold = 1060
- (Total Sales – Cost of goods sold) = 1400 – 1060
- Gross profit = 340
You do not necessarily need huge investments to earn profits. It does cost your time, especially at the initial stage. It needs good management to be able to earn profits from it.
This stream of income requires you taking risks, and a different kind of mindset.
So why are most people not earning money from this income stream?
Well, sometimes because of a lack of ideas. You can check out my post on how to come up with a side business idea you can do alongside your day job.
It could also be because of lack of guts, lack of courage, fear of failure et.c. If you fall under this category, remember that :
“Everything you want is on the other side of fear.”
Jack Canfield
I do encourage most people in the earned income category to migrate to the profit income category when they can in other to increase your quality of life.
Most people think ‘Earned Income’ and ‘Profit Income’ are the only viable means to earn money, forgetting there are 5 other streams of income.
3. Interest Income
Interest income can be defined as the amount paid to an entity for lending its money or letting another entity use its funds. In simpler terms, this is the money you get as a result of lending your money to someone else to use, e.g. putting it in the bank, lending it to the government in the form of buying Treasury Bills etc. On a larger scale, interest income is the amount earned by an investor’s money that he places in an investment or project.
This stream of income is known as a passive way of making money as your active involvement is not needed once the investment is done.
Example of interest income
A simple example would be, an individual depositing money into a savings account and deciding to leave it untouched for several months. The bank will use it by maybe lending to borrowers with the promise of them paying a specific interest. the account statement at the end of every month will reflect the interest that the bank pays for borrowing the account holder’s money.
The example above is not usually my favorite way of earning interest income. I have a stronger preference for treasury bills.
Also, this stream of income has a low amount of risk.
Can one make serious money with this stream of income?
My answer YES, especially when combined with the power of compounding.
4. Dividend Income
A better stream when compared to Interest Income. It’s not just a passive way of making money, it also makes you a shareholder of a company. Dividend income can be defined as a sum of money that a limited company pays out to someone who owns shares in the company, i.e. a shareholder. In the UK, Tax on dividends is paid at a rate set by HMRC on all dividend payments received. Anyone with dividend income will receive £2,000 tax-free, no matter what non-dividend income they have.
Guess what? This stream of income is mostly ignored and neglected as a source of earning money.
Smart investments on ex-dividend dates of good blue-chip companies can enable you to exceed the returns from Interest Income since you are also a party to the Capital Gains that the share price goes through.
An Example of Making Money from Dividend Investing
Let’s say 18-year-old Amanda just joined the workforce decides she wants to start making money from dividend stocks so she begins investing whatever she can afford into shares of high quality, blue-chip companies that show healthy growth, strong balance sheets, and have a history of increasing the dividend paid to stockholders over time.
If Amanda lives in the US, she decides to open a Roth IRA to hold her dividend stocks which means Amanda can save up to $5,500 annually. If Amanda manages to grow her investments at 8 percent for the next 50 years. By the time she reaches 68 years old and decides to retire, her portfolio would have grown to a staggering $3,155,735.86.
If she invests conservatively and chooses stocks with an average dividend yield of 3 percent, she would be collecting $94,672.08 in cash dividends each year. Remember, she doesn’t have to pay a single penny in taxes on this income because she holds the stocks within her Roth IRA account.
This is one of the key instruments that I recommend for generating adequate Cash Flow and still get very good income.
One famous dividend index is the S&P 500 Dividend Aristocrats Index, which tracks large, high-quality blue-chip stocks in the S&P 500 that have successfully raised their dividend every year for the past 25 years.
You can also investigate dividend-focused exchange-traded funds (ETFs)
5. Rental Income
This can be defined as money made from renting out an asset that you have, like a house, or a building. This income is even better but has some drawbacks when compared to the other type of income streams.
The amount of money required to create such an asset, which can generate regular rental income can be one of the biggest drawbacks this income stream has. Nevertheless, some people rent out their flats on Air BnB and still make rental income.
You need money created from other streams of income to be able to create resources from this income stream.
Rental income stream may be right for you if you:
- Prefer investments that feel more tangible than stocks and shares
- Are willing to tie up your money for a long period of time
- Understand property prices can go down as well as up
- Are willing to take the risk that you might not earn a profit on your investment
- Understand and accept the additional risks that go along with borrowing money to buy a property
- Understand and accept the costs and time involved in owning and running a property and the impact that this will have on your potential return.
You will likely need to pay income tax on rental income as well.
To make sure it will cash flow, the monthly rent on the property needs to be equal to or greater than 1 percent of your total property purchase cost. I shoot for about 1.2 to 1.4 percent.
Example:
Contract purchase price = £65,000
Closing cost = £3,000
Renovations = £12,000
Total property costs = £80,000
$80,000 X .01 = $800.
In this scenario, your monthly rent needs to be $800 or more per month to justify that property cost. So, as a very general rule, you need to get $1,000 of monthly rent for every $100,000 of property cost, not market value.
The disadvantage to this income stream to the others mentioned above is the initial amount to start up.
E.g. You can easily start earning ‘Interest Income’ or ‘Dividend Income’ with an investment as small as 1,000 pounds but you can forget about earning a Rental Income with such meager investment except you rent out properties on Air BnB.
The other big drawback of this asset is the liquidity of the asset. It is difficult to liquefy this asset quickly in times of need or when you move/rebalance your portfolio mix.
6. Capital Gains
Capital gain is a rise in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. This is the money that you get as a result of an increase in the value of an asset that you own. For e.g. when you buy shares at $10 and sell them at $11 – the $1 is capital gains, or if you buy your house for $200,000 and sell it for $220,000 the $20,000 is your capital gain. There are different tax laws in different countries on capital gains. However, there are ways to come around taxes as well.
Short-term capital gains occur on securities held for one year or less. These gains are taxed as ordinary income based on the individual’s tax filing status and adjusted gross income. Long-term capital gains are usually taxed at a lower rate than regular income.
The long-term capital gains rate in the USA is 20% in the highest tax bracket. Most taxpayers qualify for a 15% long-term capital gains tax rate.
For example,
Jeff purchased 100 shares of Amazon stock on January 30, 2016, at $350 per share. Two years later, on January 30, 2018, he sells all the shares at a price of $833 each. Assuming there were no fees associated with the sale, Jeff realized a capital gain of $48,300 ($833 * 100 – $350 * 100 = $48,300). Jeff earns $80,000 per year, which puts him in the enormous income group ($38,601 to $425,800 for individuals; $77,201 to $479,000 for those married filing separately) that qualifies for 2018 long-term capital gains tax rate of 15%. Jeff should, therefore, pay $7,245 in tax ($48,300 * .15 = $7,245) for this transaction.
7. Royalty Income
This is the money you get as a result of letting someone use your products, ideas, or processes. They make all the revenues, they do all the hard work and you get a small percentage of whatever they earn.
e.g. if you have a Subway Franchise – the royalty you send to Subway for using their processes, their logo, and marketing, etc. is royalty income for them. If you are a writer, you get paid for every copy of the book sold.
The biggest challenge here is to create something unique and then make it repeatable. This will need special skills to create such an asset but once created, there is virtually no limit to the amount of money you can earn
These are the 7 streams of income and millionaires usually earn from multiple such income streams.
Most millionaire won’t generate money using all 7 streams of income. Most of them won’t even use more than 2 or 3 income streams.
e.g. Warren Buffet, the billionaire doesn’t make money from all 7 streams. He became a millionaire by using income streams 4 and 6 – Capital Gains and Dividend Income.
He specialized on capital Gains of companies in the stock market and then honed his skills in valuing companies and investing in them.
Another example is Bill Gates, who generated income through ‘Profit Income’ and ‘Royalty Income’ streams. He created a company and created an asset known as Windows.
The best thing is to focus on what you can do right now from one of these income streams. Then become the best you can in a small niche in that income stream.
For me, the biggest risk to your financial life is being dependent on only one income stream.
Quality of life is defined differently by different individuals. The utmost goal should be to “Live comfortably”, go through life trying to find a way to balance our time spent working, with our time spent doing all the things we love to do.
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