Years ago a friend of mine told me that it was impossible to become wealthy off of just having a single job. This information hit me straight in the gut. What was I supposed to do, drive an Uber? Spend all of my time side hustling just so I could one day feel safe to retire? Happily, over time I learned that what she was referring to was the idea, popularized by Tom Corley in Rich Habits, that the wealthy have 7 streams of income, most of them passive.
Here’s my favorite 7 streams of income quote:
“If you don’t learn to get paid while you sleep, you’ll work until you die”.
It’s slightly morbid, but for too many millennials, and gen-zers, who are often overworked and underpaid, it’s true. Add on top of that, that social security is set to run out in 2037, and, well, we’re pretty much f*cked if we don’t take it into our own hands to build wealth and ensure security in our golden years.
7 Streams of Income to Become a Millionaire
The average millionaire has 7 streams of income. Most of us have just one, our jobs and our paychecks. Those of us that are lucky, probably add on a few with our investments, at the very least in our 401Ks or other retirement accounts.
But millionaires have 7! What’s most interesting to me is not the influx of cash from having so many revenue generating activities going on, but rather the security that’s created from income diversification.
In investing, the best way to keep yourself safe is to diversify. That means not throwing all of your eggs in one basket (like throwing all of your cash at crypto two years ago…). Interestingly, it’s also possible to build a safety net by diversifying income. Then if you lose your job during cutbacks, you’re still covered.
7 Income Streams of Most Millionaires
The top 7 streams of income from most millionaires are:
- Earned (re:your job)
- Capital gains
- Real estate.
- Business Profits
The question I have is, how realistic are all of these for the average person? So let’s explore each of these streams of income a bit further.
Earned Income, The Most Common Income Stream
Most people earn their income via their jobs. This is the most common form of income, with labor force participation hovering around 62%.
Unfortunately, most Americans aren’t able to transform their paychecks into other forms of income streams. The adage that it takes money to make money is true. So for the 63% of Americans that live paycheck to paycheck, unable to save anything, this is it for them.
And the sad truth is that the only way to get out from under the grind of living paycheck to paycheck is to spend less or earn more, which just isn’t a reality for many.
However, if you’re one of the lucky ones that can find it in their budget to save more money, then you’re in luck, because the next three streams of income can all come from investing.
Generate Passive Income from Dividend Stocks
Dividend stocks are those companies that pay an amount of money to shareholders on a consistent basis, usually quarterly. That’s right, you don’t have to wait for the company to grow, they just pay you cash money on a regular basis.
Sounds too good to be true? There are some downsides to dividend stocks. One is that companies that pay dividends aren’t generally growing quickly, so while you get the dividends, you don’t get the capital gains (more on that later).
You can read more in depth on dividends here.
Earn Capital Gains from Stock Investments
While we often refer to growth in the stock market as interest, really what’s being earned are capital gains. The actual dictionary definition is:
a profit from the sale of property or an investment.
So the money that you make from the sale of your stocks, isn’t interest paid (again, more on that below) it’s the value that the company has built up, and you are now (hopefully) selling at a gain.
You can learn more about investing for beginners here.
Earn Interest to Get Rich Slowly
Interest rates tend to be low, so this income stream is a slow burn, but generally lower risk than other options. Interest can be earned from a variety of places, such as CDs, bonds, money market accounts, and savings accounts.
Unfortunately, most of these options aren’t able to keep up with rates of inflation, which means looking at interest for income can be a losing game. Despite the actual amount of money going up, the value could be going down.
According to Nerdwallet, the highest interest savings account right now is earning 4% interest. In 2022, the interest rate was 6.5%, so money in these accounts lost value. Keep in mind that these numbers change all the time, so there’s no hard and fast rule here.
And while the money doesn’t go up quickly, it generally doesn’t go down quickly either. Interest earning vehicles tend to be much less volatile than stock investments, so they have role to play in your portfolio, depending on your risk profile.
To learn more about bonds, click here.
Become a Real Estate Investor.
Real estate investments can offer a solid return on your money and diversify your portfolio. Investing in rental properties, flipping homes and even Airbnb hosting can be lucrative ways to supplement your income. Residential real estate offers an array of potential investments that you can make depending on your risk tolerance level.
However, investing in real estate also requires considerable capital and is associated with more risks than some other types of investments, so it’s important to educate yourself before making any decisions.
There are other ways to invest in real estate without actually buying a physical location. REITs, or real estate investment trusts, are kind of like mutual funds, but for real estate. If you don’t want the work of being a landlord but want diversification, look around to see if REITs might be a better option for you.
Earn Royalties from You Assets
Royalty income includes any payments you get from a patent, a copyright, or some natural resource that you own.
Frankly, royalties seem like something to me that are meant for the uber rich or engineers. I don’t find them to be realistic for me, but I’d be curious to hear if anyone disagrees with that idea.
Personally, I don’t see a world in which I write a book that earns royalties, or that I invent something that I would patent. I certainly don’t own land with minerals for extraction and I’m not sure I’d lease it if I did.
If you want to learn more about earning royalties, here’s a blog from Millenial Money that covers the topic.
The Sky’s the Limit with Business Profits
Owning my own business. Profitable business that is. That’s the dream, and since you’re reading this right now, you’re participating in my dream. The coolest thing about owning your own business is that there’s no glass ceiling. The amount of income you can generate is limited only by your hustle, your perseverance, and your ability to solve problems for your audience.
But DAMN it’s a lot of work. And there is no promise of a payout at the end of the day. However, I personally think that entrepreneurship is the second best path to wealth, after investing. It’s also more accessible than ever with the booming creator economy. Just don’t let anyone tell you it’s easy, it’s not.
How Many Passive Income Streams Should You Have?
As many as you can manage! Take it from me, as I’ve been working on this awhile and have made a few mistakes along the way, go one income stream at a time. You can’t invest if you don’t have steady income.
On average it takes two to three years to turn a small business profitable (if ever… sigh) so don’t launch a blog and immediately quit your day job.
All of that being said, The best time to start was yesterday, the next best time is today. Happy wealth building!