Content of the material
- $1 Million the Hard Way
- How do you accumulate wealth?
- My 7 streams of income (updated 2021)
- Private Businesses
- Stock Market
- 4. Royalties Licensing
- Secondary Salary/Spouse’s Salary
- What Are The 7 Streams of Income?
- 1. Earned Income
- 2. Business Income
- 3. Interest Income
- 4. Dividend Income
- 5. Rental Income
- 6. Capital Gains
- 7. Royalties or Licensing Income
- Interest Income
- What are some good passive incomes?
- How can I make $1000 a month in passive income?
- 7. Business Profits
- Creating Multiple Income Streams
- How much time self-made millionaires devote to new income streams
- $1 Million the Easy Way
$1 Million the Hard Way
Let’s say you want to become a millionaire in five years. If you’re starting from scratch, online millionaire calculators (which return a variety of results given the same inputs) estimate that you’ll need to save anywhere from $13,000 to $15,500 a month and invest it wisely enough to earn an average of 10% a year. That means taking calculated risks, diversifying, and avoiding investment fees such as loads and broker commissions.
Obviously, in order to regularly save this much money each month, you’ll need to have a fantastic income. At the low end, to meet the $13,000 a month savings goal, you’d probably need to make around $265,000 annually. The specific number will vary considerably depending on your income tax situation, but the point is that it’s high.
According to the salary calculator at PaycheckCity.com, if you make $265,000 a year, are single, claim two exemptions on your federal tax return, and live in one of the nine states with no state income tax, you’d take home around $185,000 a year, or about $15,400 a month. Saving $13,000 would leave you with $2,400 a month to meet all your expenses—a perfectly reasonable number for many singles, and even some couples.
If you're willing to be extremely frugal—let’s say you can get by on a mere $700 a month—will it make a big difference? In this case, not really. You’d still need to make almost $250,000 a year.
If you’re in a committed relationship, however, things get a little easier. You can get away with making around $132,500 a year then, as long as your significant other can make up the difference and is on board with your savings plan. Of course, then you’ll have to share your millionaire status.
Big business has been diversifying its income streams for centuries. They expand their business operations into different sectors to generate new streams of income. Almost any company can diversify. A flower shop can develop a separate wedding flower business, for example, or offer mail orders. The most potent diversification is into a completely new business sector. But that takes a lot of effort and expense.
An excellent study of a company that has grown and diversified is the Virgin Group. Initially started by Sir Richard Branson as a record label, Virgin has since expanded into aviation, holidays, mobile telephony, and much more.
An example of a good way for an electrician to find other streams of income is to work with property management companies. His core business may currently be private homeowners, but management companies often need additional tradespeople. Another route could be to start offering courses to people on basic electrics and how to stay safe with electricity.
Aside from diversification, there are other ways to generate income known as the seven streams of income;
- Earned Income
- Profit Income
- Interest Income
- Dividend Income
- Rental Income
- Capital Gains Income
- Royalty Income
Many of these are not available to everyone. You need to have money already to benefit from some of these income streams.
How do you accumulate wealth?
Here’s the next key to the puzzle.
The key to accumulating wealth is uncomplicated:
- Sell your time for money,
- Spend less than you earn,
- Invest your savings so it will grow without your active intervention.
That’s it. It’s a simple input and output problem. And it’s also what separates the rich and the wealthy.
There is just one constraint on the whole system — your time in this world.
You have just 2.21 billion heartbeats. At 60 beats per minute, that’s a little over 70 years. Each beat matters.
There’s another constraint, and here is where wealth inequality rears some of its ugly head, and it’s known as Maslow’s Hierarchy of Needs.
You need to eat. You need a place to sleep. And both of those, and other needs, require money.
So in an ideal world, you could take your time to build a massively successful business (or maybe a few failures before the massive success), but in the real world, you need a job that will pay you now so you can feed yourself, clothe yourself, and secure a place to sleep.
I call it financial gravity.
If you want to really start tracking your finances, and I mean not just your spending but your investing (that’s where wealth is built), give Personal Capital a look. It’s a cornerstone of my financial system and I think you owe yourself a look. 100% free too.
My 7 streams of income (updated 2021)
Now that I’ve explained how I view building streams of income and my personal story, I’ll share with you my 7+.
I run several online businesses now (all it takes to start one is a domain, hosting, and maybe incorporation). There are two notable ones. The first is a meal plan membership site called $5 Meal Plan that I co-founded with Erin Chase of $5 Dinners. The second is the umbrella of blogs I run, including this one and Scotch Addict. They pay me ordinary income as well as qualified distributions since I’m a partner.
The bulk of my investment assets are in what we consider the “stock market,” mostly in a variety of Vanguard Index funds. I am paid interest, ordinary and qualified dividends, and will eventually be sold for capital gains. I also have some private placements that are debt and equity instruments which so far just result in interest.
To give you a sense of scale, 80% of our investable assets are in the stock market.
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.
Secondary Salary/Spouse’s Salary
No matter what venture you undertake in life, you need a team. I’m a firm believer in team work, even if it is just to bounce ideas off of, or to have someone tell you that you are off track. For many individuals, this person is their spouse, who also brings some income diversity to the table. Just like I mentioned above, if your spouse has income, try to maximize it.
I would throw in some caution here: if your spouse works at the same company, or in the same industry as you, you are not diversified, and should something happen, you could be in a world of hurt. Companies do go out of business, companies do lay employees off. There is nothing wrong with working together, but realize that you are not diversified and you should be trying to maximize other income streams as a result.
What Are The 7 Streams of Income?
1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
If you or your business has spare cash sitting in the bank account, it is losing money. There are many ways you can put your money to work and earn a passive income stream.
Maybe invest it in a savings scheme and use the power of compound interest to gain a passive income. Buying government bonds is another safe investment that will generate interest.
What are some good passive incomes?What are the best passive income ideas for 2022?
- Start a dropshipping store.
- Sell courses online.
- Monetize a blog.
- Create a job board.
- Invest in the stock market.
- Create a print-on-demand store.
- Sell stock photos online.
- Become an affiliate marketer.
How can I make $1000 a month in passive income?9 Passive Income Ideas that earn $1000+ a month
- Start a YouTube Channel. …
- Start a Membership Website. …
- Write a Book. …
- Create a Lead Gen Website for Service Businesses. …
- Join the Amazon Affiliate Program. …
- Market a Niche Affiliate Opportunity. …
- Create an Online Course. …
- Invest in Real Estate.
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.
Want to know your individual net worth? Use this FREE net worth calculator to find out!
Creating Multiple Income Streams
The point is that you can diversify your income in various ways. You can basically choose one of each from the categories above, and create a very diversified income portfolio.
The other point is that it is pretty easy to get started. You don’t need to be super rich, and you don’t need a lot of time to get started. To say it requires no time would be a lie, but you don’t need to make anything listed above your life. You can work at your job, invest your excess income, save to buy a rental property or rent out a room in your current house, and you start a side job online without breaking a sweat.
The reward from these activities will be financial freedom!
How much time self-made millionaires devote to new income streams
If you have a consuming 9-to-5 job and/or other sorts of commitments at home and at work, carving out the time to devote to starting another income stream might seem daunting. Based on what I've learned from my research, you can start small:Set aside no more than five hours each week and begin slowly building something new.
If you're not sure where to start, think about the subjects, skills, and activities you are most passionate about, and explore the ways that you could monetize one of those.
In my research, other than consistent saving and investing, passion was by far one of the most important shared attributes of the self-made millionaires in my study.
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$1 Million the Easy Way
A short-term plan for creating wealth certainly includes these personality traits, but it often includes factors such as timing, luck, and/or possessing an incredibly valuable idea and knowing how to implement and market it. If you know you’re closer to average, consider a more traditional, more attainable approach.
The longer-term road to wealth involves such time-honored tactics as avoiding consumer debt, diversifying your investments, minimizing your investment fees, tax planning, minimizing housing expenses, and, for two-earner households, living on one income.
Putting aside someone's $40,000 in take-home pay every year—and earning that 10% return as described above—will get you to millionaire status in about 15 years. Halve those savings and you’re still only looking at 20 years. It will take more work for sure, but it’s a lot faster than 51.