7 Types of Income Streams
7 Types of Income Streams
It is often said the average millionaire has 7 types of income streams. The average person typically has 1 stream of income, usually from their job, and this can put them in a vulnerable position financially.
If you take a look at the average millionaire, it is true that they have multiple streams of income-generating cash flow.
But not all types of income are the same. Some are active, some are passive and some are a hybrid of both.
Some are highly taxed and some are leveraged to have no tax at all.
First Type of Income: Earned Income
This is the most common type of income. This is true from the regular employee to the CEO of the company. Of note, CEOs are still an employee of a company. Other examples belonging to this category are nurses, physicians, and pharmacists.
Earned income is when you exchanged time for money. That is why it is called an active income. You can count freelancers in this category as well.
Earned income is typically the starting point for both self-made millionaires and a regular Joe. This is the income that you help you provide for yourself and your family.
However, this is where most people are stuck with. This is not good because this is where you have to leverage your time, which is a limited resource. You only have 24 hours in a day like everyone else. Therefore, there is a ceiling on how much money you can generate in this category.
Another pitfall of active income is that it is highly taxed. Dependent on your income, you can be taxed as much as 37% of your income!
We must know what other types of income are out there.
Second Type of Income: Profit Income
In this income category, money is generated when products or services are sold more than they cost to make or buy them. This is when you move from being employees to an entrepreneur.
In the past, starting a business requires a lot of resources and effort, but it has become much easier in recent years with the help of the internet.
If you’re selling a service or products that is more than the cost then you’re making a profit income. This type of income can be both active or passive income, depending on your business model.
If you make things yourself and sell them, then it’s more active income. This may be a little difficult to scale. However, if you create the design of a product and have a manufacturer create it for you or you created a digital product then this has the potential to be a passive income.
There are two types of profit income:
Individual profit income is on a smaller scale and it is hard to scale up. You can create the product yourself or flip it online. Examples include selling things on eBay or the Facebook Marketplace. Don’t get me wrong, this is a great way to add to your income.
A scalable profit income is by having a manufacturer makes the products instead of manually making it yourself. This way, you can free yourself and focus it on other parts of your company like marketing.
Digital products are another great scalable business model since it does not require storage or shipping.
These two types of income are taxed differently. As an individual entity, you may be taxed up to 37% of your income. On the other hand, as a business, you can take advantage of tax breaks by forming an LLC or corporation.
Third Type of Income: Interest Income
Interest income comes from the money you collect in interest from the money you lent. Now, I don’t recommend lending your money to your friends, this is typically not a good idea.
But there are a few ways to creat this form of income.
Examples include lending money to a bank in the form of a CD, companies in the form of a bond and the government in the form of treasury bills.
This is typically the safer way to invest your money but is not the most lucrative. They typically earn an interest of 1 to 4% per year. There are other ways to invest your money but along with higher risks.
Interest income is a form of passive income since your active involvement is not needed.
Fourth Type of Income: Dividend Income
This is when you invest in stocks that pay part of the profit to the shareholders.
When buying stock from a company, you become a shareholder. When the company report profits, they will send you a check as their shareholder, typically every quarter.
So by owning stock in the company, you’re getting a small share in the profit.
If you make $37,950 in income, you may be eligible for a 0% tax on the dividends earned. This tax scale tops off at $425,801, after that, you may have to pay up to 20% on taxes. Remember, this is much lower than earned income since that can go up to 37% of your income.
Fifth Type of Income: Rental Income
Rental income is from buying a property and renting it out to other people. Rental income is not limited to residential properties. It can be on commercial and industrial properties.
Real estate is not the only source to generate rental income. You can rent out your car and equipment and earn rental income.
Rental income is any income generated by lending someone your property in exchange for money.
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Sixth Type of Income: Residual and Royalty Income
This type of income is when you continue to get paid after your work is done. Examples include a movie that continues to be watched, wrote a book that is still being read, or a YouTube channel that continues to be viewed.
Royalty income is a form of residual income. This is when you allow other entities to use your intellectual properties (IP) to make money. Examples include music and books.
Musicians allow record companies to use their IP to allow the masses to listen to and earn royalty income from the proceeds. Another example is a book, as long as people are still buying the book, the author will continue to make money from royalty fees.
Royalty money can be generated from multiple streams. Take, for example, JK Rowling, the author of the Harry Potter series. She not only make money from her book but also money from movies and merchandise as well.
In fact, she is still collecting royalties from Harry Potter today, since it still has high interest among fans.
Seventh Type of Income: Capital Gains
We’ve reach the last of the 7 types of income streams.
This type of income is when an asset that appreciated is sold. Popular examples include real estate and stocks but there are other types of assets.
For example, if you bought a real estate property for $150,000. and sold it for $250,000. This is a capital gain of $100,000.
Another example is when you bought 100 shares of a stock valued at $20 and sold it for $120 per share. Your capital gain, in this case, is $10,000.
One of the benefits of capital gains income is that taxes are much lower. Capital gain taxes ranged between 15 to 20% dependent on the amount earned.
|Capital gain tax||Your income|
|0%||$0 to $39,375|
|15%||$39,376 to $434,550|
|20%||$434,551 or more|
In many cases when you received capital gain from selling a real estate property and reinvest into the market you will potentially get a 0% tax rate.
Final Thoughts on 7 Types of Income Streams
Here’s a quick recap of the 7 types of income streams for millionaire:
- Earned income
- Profit income
- Interest income
- Dividend income
- Rental income
- Residual and royalty income
- Capital gains
Knowing the different types of income can guide and help us into potentially adding more sources of income into our lives.
Which source of income sounds the best to you?
Which will you add to your income next?
How many sources of income do you have?
Please comment below!