According to a study by IRS on the tax return of 6,053 wealthy individuals, it shows wealthy individual build up their income from these 7 income streams.
7 income streams of millionaires:
- Earned Income – Income earned from employment.
- Profit Income – Income earned from business.
- Interest Income – Income earned from savings, bonds, or other lending activities.
- Dividend Income – Income earned from the stocks you owned.
- Capital Gain – Earnings earn from selling of assets.
- Rental Income – Income earned from rents your received by renting out your assets.
- Royalty Income – Income earned from selling the rights to use of your original creation.
7 income streams of millionaires
There are 2 main type of incomes:
- Active income – Income earn by completing a task actively. Active income usually require you to exchange time for money.
- Passive income – Income earn at intervals due to a decision or task performed previously. Passive income do not usually require you to exchange time for money.
In this article, we shall rate each type of income streams in terms of their ‘income type’ and ‘popularity’ amount millionaires:
- Income Type: Passive Income or Active Income
- Popularity: Low or High
1. Earned Income
Earned income is also known as salary income, which is any income that is received from a job or through self-employment. Earned income include salary, tips, bonus and commissions. Earned income generally requires you to exchange your time for money.
Examples of earned income:
- Salary received from the job.
- Tips received from the customers.
- Bonus received from the job.
- Commission received from sales.
Not a lot of millionaires are made from earning from this type of income stream.
Unless you are a CEO, or a director of the company, becoming a millionaire by earned income can be quite difficult.
Some people even jokingly said,
“JOB means Just Over Broke.”
In other words, having just a job is just one step from being broke. Not that I will like to agree with such a statement, but most people who only have an earned income may become broke once they loss their job.
Having just a JOB is like putting all your eggs in just one basket.
Unfortunately, most people stick to this one stream of income, because this is the easiest to obtain and having a job keep them in their comfort zone.
People like getting a job because their next payday are somewhat predictable. Having just earn income is also the main reason why many never become a millionaire.
Earned income is a great way to start as your 1st stream of income, but if you want to become a millionaire, you should adopt a few more streams of income to increase your chances of success in becoming a millionaire.
Type: Active Income
2. Profit Income
Profit income is the net income you get from a business. Profit income is what you get after your expenses from running the business. Businesses earn a profit by buying goods or services at a low price, and sell them at a higher price. The difference in price is where you make the profit.
Example of profit income:
- Selling physical goods such as, an lemonade stand business or a café.
- Selling services you’ve offer such as, house agents, plumber etc.
- Selling goods from an online store such as, eCommerce.
- Selling in online marketplace such as Etsy, eBay and Amazon.
You can make a profit income by starting your own business.
With the help of the internet, businesses can be set-up with relatively low risk and capital.
People setup their online eCommerce stores selling different items to billions of customers world wide.
These online stores are open 24/7 everyday, all day.
With as low as $100 you can too setup your own business and earn your first profit income.
The $100 Startup by Chris Guillebeau is a great book to start learning how others have achieve this.
Many millionaires are made from earning a profit income.
Type: Active/ Passive Income
3. Interest Income
Interest income is the amount earned from lending money or letting another entity uses a fund. When you lend your money to an organization or an individual, you will receive an agreed amount of interest paid over a period of time.
Examples of interest income:
- Certificate of Deposit (CD) or Fix Deposit.
- Bonds from the bond market
- Treasury bills from the government.
Buying Bonds, or Treasury bills means that you are willing to borrow the organization, or government your money for a said period of time for a certain interest rate.
Interest rate of a government bond can lies in the range of -0.38% to 47.05% depending on the risk of default and the time frame your are willing to lend your money to the borrower (organizations or government).
The amount of interest income you can earn from a government bond is highly depending on the defaulting risk of the borrower.
Interest income for U.S. Treasury Bill or Government Bond for the last 5 years range from 1.37% to 3.24%. This low interest rate is because of the low risk of the U.S. government defaulting the money that you are lending them.
United States Government Bond 10Y
Here are some of the best performing bonds for the past 10 years according to the most recent data just for your reference:
- High-Yield Bonds 7.98%
- Emerging Markets Bonds 7.78%
- Long-Term U.S. Corporate Bonds 6.97%
- Long-Term U.S. Government Bonds 6.78%
- Barclays U.S. Aggregate Bond Index 4.62%
Higher defaulting risk usually result in a higher interest rate, and a lower defaulting risk usually result in a lower interest rate.
Type: Passive Income
4. Dividend Income
Dividend income is the income you get from the distribution of company’s earning to its shareholders. Some companies pay their dividend on a half-yearly basis, while most pay their dividend on a quarterly basis.
Types of dividend paid by companies:
- Cash dividend – Company shares portion of its net earnings with its shareholders in the form of cash.
- Stock dividend – Company gives out shares to its shareholders in proportional to the amount of shares the shareholders holds.
- Stock repurchase – Company give the investor an option to sell their shares back to the company at a fixed rate.
In fact, dividend income is my favorite type of income. Simply because dividend income are passive income.
Furthermore the return on investment can be in the double digit.
I am currently holding some dividend paying stocks that gives a double digit dividend yield. And if you want to learn how to invest in dividend paying stocks, you may wanna to check out my other post on dividend investing.
Many millionaires live off with just their dividend income.
Not only a good dividend income can help you to retire without worries, it helps young investors to build their wealth.
Another advantages of getting a dividend income is harvasting the power of compounding.
Many multi-millionaires are made through dividend income with the help of the power of compounding. With time at your side, compounding can work miracles.
Albert Einstein was famously quoted:
“Compound interest is the 8th wonder of the world.”
Dividend income is so important that I even write a whole series of article about Dividend investing
How much dividend income does Warren Buffett make?
Warren Buffett created a high dividend yield portfolio through sound investing in great companies for the past few decades.
According to Nasdaq, Warren Buffett received $3.8 Billion dollars dividend income in 2021 by investing in just 6 companies.
- Apple (NASDAQ: AAPL): $791,070,204
- Bank of America (NYSE: BAC): $743,653,444
- Coca-Cola (NYSE: KO): $656,000,000
- Kraft Heinz (NASDAQ: KHC): $521,015,709
- American Express (NYSE: AXP): $260,770,404
- U.S. Bancorp (NYSE: USB): $251,311,662
This dividend income have been increasing every year.
When investing is done right, the power of compounding will help you create miracles.
So, does dividend income create Millionaires?
No, dividend income create Billionaires.
Type: Passive Income
5. Rental Income
Rental income is the total amount of rent and related payments you receive from renting out your asset. Rental income can be subjected to income tax. The total amount of net rental income you can receive from your investment will be after any expense you required to pay for renting out your asset.
Examples of Rental Income:
- Rent that you receive by renting out your assets.
- Late charges you receive for the late payment of rent.
You can gain a rental income by renting out an asset which you own.
This asset is usually a house, a room, or even a car.
“oh, so my car is my asset?”
The answer is ‘Yes’ and ‘No’.
You car can be an asset, or an liability. The difference is pretty simple. As explained by Robert Kiyosaki’s Bestseller ‘Rich Dad Poor Dad‘.
Asset are things that help you bring in money.
Liabilities are things that take money out from your pocket.
So, if you buy your car and for daily use such as communing around the town. It is basically an liability, as you have to pay it’s car loan, maintenance etc.
But, if you rent out your car, or use it as a tool to help you earn an income. It is now an asset which helps you to bring in money into your pocket.
Increase your rental income by building your asset.
Millionaires earn their millions by buying rental properties.
- Understand the rental market.
- Assess the rental properties and its potential rental returns.
- Buy rental properties at good location with high return on investment.
By renting out each property, they create multiple streams of rental income through a portfolio of properties.
Rental income with properties is not only a great passive income, but also gives high return on investment due to leveraging.
But there is one big drawback on the rental income.
Rental income usually requires you to have a certain amount of money to buy your first asset. Thus, it is not that easy to start having a rental income until you have accumulated a certain level of wealth.
Alternative ways to make rental income
- Rent out your spare room for an extra passive rental income.
- Rent out your car when you are on a long holiday for an extra income.
- Rent out your bicycle for the community to use and earn rental income
- Rent out an asset which is in demand by others.
- Buy Real Estate Investment Trusts (REITS) where it allows you to invest in a large portfolio of properties.
Invest in rental property in the form of REITs
Buying Real Estate Investment Trusts (REITS) can be a great way to invest in properties.
Although the income you get from investing in REITs is called dividend income, I will still like to mention it here as an great alternative to rental income.
With just a few hundred dollars, you can invest in a portfolio of professionally managed properties.
If you want to learn more about REITs, you can check out my REITs investing series as well.
REITs have many benefits over buying the whole property which you might be interested. Each types of REITs have their own characteristics.
My favorite is Healthcare REITs, what’s yours?
Type: Passive Income
6. Capital Gain Income
Capital Gain is the appreciation (increase in value) of an investment and it is considered to be realized when the investment is sold. Capital gain can be subjected to capital gain tax in certain countries, where taxation usually differs between short-term (one year or less) or long term (more than one year).
Example of capital gain income:
- Financial investment – Profit gain from the sale of stocks.
- Real estate – Profit gain from the sale of properties.
- Collectables – Profit gain from the sale of your personal collectables.
Great stocks or properties that is located in good area usually increase in value over time.
These assets can sometimes double or even increase ten times the original value over time.
Example of capital gain on stocks:
- You buy 100 shares of a great company at the price of $10, 10 years ago. You paid $1000 for 100 shares.
- Today, after 10 years of holding the stocks. Each shares of the company raise to $20 per share and you decided to sell the 100 shares you own.
- You sell 100 shares at the price of $20, you received $2000 for selling 100 shares.
- $2000 (You Received Today) – $1000 (You Paid 10 Years Ago) = $1000 (Capital Gain)
The difference between the price you pay, and price you sell is the capital gain.
Many millionaires earn their money through sounds investing and getting a good capital gain from each of their investment.
But the downside of this investment is that, it is non-recurring.
Once you have sold the asset, you need to find a good valued asset again and repeat the process.
Type: Semi-Passive Income
7. Royalty Income
Royalty income is income received from allowing others to use your original products, ideas, content, design, or process in return for a payment. Royalties are legally binding, thus the person who use of the property will required to pay for the right of using the property.
Generally people buy these rights to generate a revenue for themselves.
Examples of Royalty Income:
- Patents – New Technology, Pharmaceutical products
- Copyrighted works – eBook, Music and photos
- Natural resources – Oil, gas, or mineral
- Franchises – MacDonald, KFC, Pizza Hut, Dominos Pizza
How to create Royalty Income?
Royalty income can be earn by first creating an original product, or ideas.
Then you will sell this temporary usage rights to someone who want to use it in exchange for a cut from what they earn from your product.
What they pay is a royalty fee and what you earn is called royalty income.
Some of the most famous companies build through royalty income is MacDonald or KFC. People who wants to open a new MacDonald franchise will pay MacDonald a royalty fee for using their logo, marketing and process.
You on the other hand can get royalty income by writing eBooks and sell them in Amazon, or any other publisher. Each book they sold, will give you a certain percentage as a royalty income.
Why should you consider creating royalty income?
- Starting cost for creating royalty income is very low, which gives you a very low risk to start.
- No limit on how many original products you can create.
- No limit on how many products, or types of products you can sell.
- Everyone have almost an equal chance to succeed.
- Success is determined by your own creativity and ability.
Type: Semi-Passive Income
Does the average millionaire have 7 streams of income?
According to a 5 years study on self-made millionaires. Research have found most millionaires have 3 streams of income. The study shows an interesting correlation on self-made millionaire and the number of income streams.
How many streams of income does the average millionaire have?
- 65% of self-made millionaires had at least 3 streams of income.
- 45% of self-made millionaires had at least 4 streams of income.
- 29% of self-made millionaires had at least 5 streams of income.
Contradictory to popular believe that an average millionaire must have 7 streams of income. 65% of the millionaires have 3 streams of income.
Having a multiple streams of income is the same idea as diversifying your portfolio during an investment.
Most people who have only 1 or 2 streams of income will suffer when something happens to their income stream.
Events such as retrenchment from their job, or facing a major market crash from the stock market will be devastating.
With the same idea of not wanting to put all your eggs in one basket, you don’t want to have only 1 or 2 streams of income.
Aim to have at least 3 or more streams of income will greatly enhance your success in becoming the next millionaire and secure your financial future.
how to be a self made millionaire
- To be prepared like a Millionaire, you’ll need to invest in yourself and keep learning new things.
- To think like a Millionaire, you’ll need to develop a wealthy mindset.
- To act like a Millionaire, you’ll need to learn the winning habits of the super successful.
- To take the first step of becoming a self made Millionaire, you’ll need to take action and create your 3 streams of income.
- To become a Millionaire from nothing, you’ll need to be a hustler.
The key is to become a millionaire is to be focus at your goal.
Find an income stream that you are passionate about creating, and focus in making that income stream amazing.
But, if you are not focus.
Even with 7 or more streams of income will not make you a millionaire.
Multiple income streams have made thousands of individuals into self-made millionaires every single year.
Although each additional stream of income will greatly increase your chances to become a millionaire. But the key to success is to be focus in what you do and do it well.
7 income streams of millionaires:
- Earned Income
- Profit Income
- Interest Income
- Dividend Income
- Capital Gain Income
- Rental Income
- Royalty Income
Aim to have at least 3 streams of income which you are highly passionate.
(Personally, I prefer interest income, dividend income, rental income and royalty income. If you’ve notice, most of these income streams are passive income.)
With discipline and determination to succeed, you can become a millionaire.
But before you can truly become a successful, there is something you need to have.
Knowledge is what differentiate a dreamer from one who succeed. People achieve success not by lottery but because they have the right knowledge to and know what to do when an opportunity arises.
An average CEO read approx 52 books a year.
Knowledge can be learn from books or articles like this one. Reading can only make you wiser and smarter, so that you too maybe able to make the right decision when the opportunity presents itself.
Will Durant Said:
“Education is a progressive discovery of our own ignorance.”
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