7 Streams of Income:
1. “Earned income” – exchanging time for money
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. Now, this is where your quality of life will suffer the most, because you will be trading your time for money.
2. Business Profit income
Money that you earn by selling something for more than it costs you to make.
e.g. Businesses selling their goods at a profit, whether at the retail or wholesale level, as distributors or manufacturers. You need to be an entrepreneur for earning profits.
3. Interest income
The money you from variety of loans, either to individuals (peer to peer lending or private notes) or companies (bonds, notes); as a result of money you lend 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.
This is a great source of passive income where your active involvement is not needed once the investment is done. Many doubt on the seriousness of wealth ‘Interest Income’ can generate, but when combined with the power of compounding, and the fact that this is a true passive income with least amount of risk, this can beat any of the first 2 sources of income generation hands down.
4. Dividend income
This income gets even better than Interest Income. It is equally passive and not only that, it also makes you a shareholder of a company. This is the money that you get as a return on shares of a company you own.
For e.g. the dividend that most companies announce at the year end. The better this stream of income sounds, the more ignored and neglected is this source of income.
5. Rental income
From real estate, renting out an asset that you have, like a house, or a building
6. Capital Gains
The money that you get from the sale of investments, as a result of increase in 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.
7. Royalty income/Residual income
You do something one time and you get paid over and over again from that one-time effort
– Ex. Music artist sings the song one time, yet gets paid every time their song is purchased or played on the radio
– Ex. Verizon signs their customer up for phone service one time, yet they continue to get paid every month the customer pays the bill
But here is the crux for millionaires : You would hardly find any wealthy billionaire with an income stream only from the ‘Earned Income’ category.
And the reason for the same is very simple: This stream is where our time utilization is least efficient, and since there is a limit to the number of hours we can put in a day, there is also a limit to the amount of money we can earn from this stream of income. All other streams of income are not directly dependent on time, and hence can leverage time well to generate huge wealth.
So go on, chose your streams. The biggest risk to your financial life is being dependent on only one income stream where you are actively involved. Each of these streams are one step above the other. You just need to get into the details and understand them more. Try it out. It could well be life changing for you and your upcoming generations.