How Millionaires Create Passive And Active Income Streams Explained
We’ve all worked a soul-crushing 9-5 job where it seemed like you’ll never be able to get ahead. It’s difficult, if not impossible, to build real wealth when you’re working a minimum wage or low income job.
So how do millionaires earn income? Millionaires have essential 7 income streams, some passive, that allow them to earn money all the time. They don’t trade time for money like at most jobs. Instead, they’re creators and innovative business people.
I’ve read through this document by the IRS, which shows the biggest differences in the tax returns of millionaires vs regular people. Below, I’ll go into detail covering all 7 of the income streams millionaires and the wealthy use and give you ideas for implementing them yourself.
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1. Earned Income
Earned income is one of the first income streams of millionaires and is one that most people understand. Earned income comes directly from your job.
Most people rely solely on earned income for their livelihood and thats a HUGE mistake. You’re trading hours of your life for dollars. When you need more money, you work more hours. The problem is that everyone gets the same 24 hours in a day and there’s only so much work you can do.
So how this would work is if you have a job but want to earn more income, you can either try to get a job that pays you more per hour or take on a second or third job. This may mean working overnights or on weekends.
The problem with this is that you’re continuing to trade more and more of your time for money. Instead, your goal should be trading your time for more money. Instead of making $13/hr, make $25/hr, and work the same or fewer hours as before.
How To Increase Your Earned Income
If you want to increase your earned income like the rich do, then your best bet is to use your brain rather than braun. One example of this is to increase your skills and knowledge.
If you’re stuck working a minimum wage job, what skills would you need in order to become a manager or assistant manager? Look for free business training or find a business mentor who can show you the ropes.
Something as simple as going from a store employee to a manager can increase your hourly wage by $10 or more. You’re still working the same number of hours but are getting paid significantly more per hour.
How To Increase Income But Work Less
Everyone has the same 24 hours in a day. If you want to get out of the thought process of trading your life hours for money, then you’ll want to cultivate a specialty skill.
Specialists in a field are some of the most highly paid people. They can earn hundreds of dollars an hour which allows them to work a lot less. You may be surprised to know that you don’t have to have a PhD or be a world-known specialist for this to be the case.
The internet has opened up a huge number of online careers that once weren’t available. They’re completely remote and fancy schooling isn’t required. Your experience and results are what matter.
One example of this is becoming a social media manager. It was once a field where a degree in communications was required and you were hired as a full-time company employee.
Now, you can easily start your own freelance social media management business without a degree. Specialists who get results can earn $200 or more per hour. If you’re looking for more ideas, check out these stay at home jobs.
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2. Dividend Income
Dividend income is a form of income that’s paid from the shares of a company you own. Another common name for these are dividend stocks.
This is a passive form of income since you don’t have to actively buy or sell stocks. You’re considered a shareholder in the company you own the dividend stock in.
At the end of the year, if you owned 100 shares of dividend stock and each earned $2 in dividend income, that’s $200. As you scale this up with more and more shares, the earnings are significant.
The key is to pick the right dividend stock which is easier said than done. You also risk the company going out of business and your shares becoming worthless. Most dividend stocks have an extremely low yield of 2-3% so if you’re young, investing in well-diversified index funds may be a better option since the growth potential is higher.
As with any investment, make sure you have a complete understanding before investing and consult a licensed financial professional.
3. Rental Income
Rental income is the money that you earn from your tenants after the mortgage, management, and all other costs are subtracted out. It is the result of you owning something and renting it out to others.
This could include single-family homes or apartment buildings renting to everyday people to live in, or it could be commercial real estate renting property to other businesses to use.
The majority of millionaires own a large amount of real estate because it’s such a powerful type of income stream. Land is a finite resource; once it’s all bought, more isn’t going to be created. The wealthy understand this and buy real estate in popular locations or up and coming neighborhoods because those assets appreciate faster.
One of the biggest drawbacks of real estate is the large amount of money required upfront. Even if you get a loan, you’ll still need to put down a sizable deposit to the bank.
Real estate’s greatest weakness is also its greatest strength. With real estate, if you want to buy a $200,000 house, a bank will often loan you the money with only a 10% downpayment of $20,000.
Related: How to Save for a House Downpayment
If you wanted to buy $200,000 worth of stocks, you’d need $200,000 on hand. No bank is going to loan you money to buy stocks because they deem the risk too high.
Real estate is considered a much less risky investment by banks because there’s a tangible item (your house) and the housing market is generally less volatile. It’s not less risky for the home buyer because if you can’t find tenants or come on hard times, your mortgage still needs to be paid or the bank will take your house.
People who over-leverage their investment property purchases have a high net worth built on a house of cards. It takes only one economic downturn or issues with one of the properties for it all to come crashing down. That’s why when going the real estate route, it’s important to not bite off more than you can financially handle.
Why Will Banks Loan You Money For Real Estate But Not Stocks?
Banks will lend people money for real estate but not stocks because real estate is considered a lower risk. Property owners have insurance on their homes which is something you can’t get with stocks.
Banks see real estate as more secure than stocks because there’s the value of the land as well as the value of the home that they can force a sale for if they need to recuperate their costs.
With stocks, the price you buy them for is the price they’re worth. This isn’t the case with real estate. Sometimes, life events happen where someone is desperate to sell a property. If you’re savvy at identifying investment real estate, you can purchase a property for less than it’s actually worth.
4. Royalties & Licensing
Royalties are a powerful passive income stream for someone who creates their own products. It can be a process or idea that you then license the rights for others to use for a fee.
Someone’s ideas and created products are considered privately owned so you aren’t allowed to take them without their consent. It’s actually considered theft.
The largest example of this is for book authors. A book author licenses their work to the publishing house. The publisher then formats, prints, and sells the book. Depending on the book deal the author negotiated, they get a percentage of the profits called royalties.
While it may take a year or more for the author to write the book, they can continue to earn royalties for years after publication. This is a wonderfully lucrative passive income stream if you have lots of ideas and can produce products or get patents.
Being an innovator and creator is one of the main habit differences between a rich vs poor person. People who create wealth don’t waste their time being unoriginal.
Interest income is the money you earn from lending your personal money to someone else. You can earn interest from a bank, money market account, lending it to the government (Treasury Bills), Certificates of Deposit (CDs), and many other ways.
Earning money in the form of interest is exactly like the money that credit card companies charge or the interest you pay on your mortgage. You earn a small percentage on the money you put for others to temporarily borrow.
Earning interest from your bank has no risk because they’re FDIC insured. If the bank makes a bad investment and loses your money, you’ll get it back because the federal government insures it.
You can also earn interest if you sell a business and allow the buyer to pay you back in installments over time plus interest. When doing this, you won’t have all of the money from the business you sold immediately but if you deem the buyer a low risk, you may decide this type of situation is ideal.
For example, you could sell your business or a franchise and allow the buyer to take 5 years to pay the full amount to you. Every month, the buyer would pay you the set principle amount plus the percentage interest you settled on.
During this time, the buyer is running the company but if they default on the loan, you’d be able to take the business back. Of course, this would all depend on the contract you set up with your lawyers.
6. Capital Gains
Capital gains are the money you get due to the increase in value of an asset you’re selling. It’s the positive difference between the sale price of the asset and the original purchase price. This includes stocks, real estate property, bonds, jewelry, coin collections, or cars.
Capital gains differs from investment income though. Capital gains are purely the profits from selling an investment for more than its worth. Investment income is a term that includes capital gains, dividends, interest, and other profits made.
To earn money through capital gains, most common ways are buying properties at a low price and selling them for profit or buying growth stock funds and selling them once they’ve increased in value.
Capital gains does have a tax implication so make sure to check with your tax professional before selling off large assets.
7. Business Profits
Business profits are different than salaries. Salaries are the amount you earn for doing your job. It can be hourly or an agreed upon yearly sum. Business profits is the money left over in the business after all other expenses have been paid.
Business profit can be made through advertising, selling products, or providing services. All money that a business earns gets added into the business’ profit tally for the year.
Some business owners reinvest this excess money back into the business but they can also take it as a bonus. Often, business owners will wait until after taxes to take a lump sum business profit. This is hard-earned money for creating a successful business.
Since business profit may be inconsistent, instead of increasing one’s salary and potentially hurting the business, keeping the same salary and giving oneself a bonus of extra profit is a more conservative option.
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How Many Income Streams Do You Have?
Now that you know the 7 income streams of millionaires, compare that with how many you currently have. Most people only have one or two with a job and rental property being the most common.
The benefits of having multiple income streams in that you’re more recession proof. Financial hiccups are less likely to derail your trajectory. If you lost your job or a tentant isn’t able to pay rent, you aren’t left bankrupt.
This can create an immense peace of mind. By leveraging your time now to create additional income streams, you can be on the path to ensure your family’s financial security.
Rich people understand that there’s only so much money to be earned by trading your time for money. If you truly want to build wealth then passive income streams are where your time should be spent.
There’s no truly passive income stream where you never have to put in effort to earn money. Most passive income avenues require intense work upfront but allow the ability to earn for years without any additional effort.
Let me know what income streams you currently have or want to add.