How many different types of income streams do you have? While most of us have one source of income that dwarfs the rest, it’s not uncommon for millionaires to count 7 streams of income.
Based on the list below, I can claim five or six. If my lazy butt ever decides to write a book, perhaps I could call it seven.
I think doctors have an advantage in that you really only need the one primary income stream to become a millionaire and then some. Once that happens, some of the others come naturally, but you can always add a couple more if you choose.
This post was originally published by my dentist friend, Dr. Jeff Anzalone, on Debt-Free Doctor
When I began a start-up specialist dental practice in 2005, I mainly focused on networking with other dentists for referrals and anything else I could to increase new patient numbers. As a matter of fact, this was my main focus for years. Young doctors are hungry and new patients are their food for survival!
So immediately we go from training, and not worrying about money, to entering THE race, the Rat Race. Unfortunately, this is a race that nobody can win yet most of us, myself included, enter, whether we realize it or not. Sometimes people stay in this race their entire careers not knowing any better. For others, they understand that the key to health, wealth, and happiness is exiting the race once financial freedom is accomplished.
But how can a well-trained professional, like a doctor, dig out from hundreds of thousands of dollars of debt over the course of their career, keep up their “lifestyle,” and still become financially free? Unfortunately, most can’t. The main reason is that they focus on only one core goal their entire career: making more money. Instead, they should think about how they’re making money (more important).
Does that make sense?
If you’re new to this blog then you may be confused. What do I mean by how we make money? It wasn’t until I started educating myself about finances that I learned about additional income streams such as passive income. Let me explain.
When you get out of school, typically you’re focused on starting on your new career path only. For instance, if you’re a new doctor, you’ll have your sights set on working in medicine for the next 35+ years, just as I did after dental school. There’s nothing wrong with that path as each person is different. But as you know, life isn’t fair and many of us face different challenges such as injury, loss of a spouse, alcohol or drug addiction, and the like. Essentially, while you may “think” you have the next 35+ years all planned out, I can almost assure you it will not end up the way you think. That’s life – so enjoy the ride!
After I endured one of those challenges — a minor snow skiing accident — it occurred to me that all of our bills were being paid via the dental practice. If Dr. Jeff wasn’t “knee deep in tha’ mouth,” no money was coming down the pipeline. That seems like a risky way to live, right? But hey, like I said, life ain’t fair and things happen for a reason. Heck, if this hadn’t happened, then you wouldn’t be reading any of my blog posts now.
Once I realized where my income was coming from, I soon discovered I needed to hedge against future risk in the form of extra income streams, and I began researching what the average millionaire does.
3 Types Of Income
Before we go any further, you should first realize that when it comes to making money, there are only three types of income:
- active (earned) income
- passive income
- portfolio income
Unfortunately, most people go their entire careers with only one income source.
Most people receive active income streams from their day job or business. This happens each day you go to work and provide a service in which someone pays you. This type of income is also the highest taxed of the three income types.
If you earn active income only, you’re trading your time for money.
This type of income is what I’m mainly focused on growing. It’s not directly tied to active work performed.
Sounds pretty cool, right? But realize that it has to come from somewhere. And that somewhere is typically the active income that’s from the work you do.
In other words, Dr. A treats patients and makes an annual salary. Instead of spending more than he makes (like many docs do), he focuses on investing in assets that will provide extra cash to pay for his liabilities down the road.
The IRS states that passive income streams are derived from:
- rental properties
- limited partnership
- or other enterprise in which one is not actively involved
The third type of income is portfolio income.
It’s generated from:
- interest payments
- capital gains from selling stocks
Multiple Streams of Income
After my skiing accident, I began to study how millionaires make their money. One of the things that stood out to me was the fact that most millionaires had multiple income streams. At that time I had only one.
Not good. I guess we really should not keep all of our eggs in one basket.
“If you don’t find a way to make money while you sleep, you will work until you die.” – Warren Buffett
I understand that this idea of having new income streams sounds like a great way to live. But many people go through life and struggle to try and figure out how to create a single income stream, let alone more than one. Starting out, I felt this same way until I started studying what the most successful people were doing.
It seems that many were learning from the same resources such as books, podcasts, and courses. Two of the more popular books were:
These different resources began to open my eyes to how I could get money to start working for me instead of the other way around.
Now that we’ve discussed the 3 types of incomes and how important it is to NOT operate your financial life on relying on only ONE source, let’s get into what we’ve all been waiting for…..the 7 income streams of millionaires.
What Are The 7 Streams of Income?
#1 Earned Income
As discussed above, this type of income is what comes in from your primary job. If you’re an engineer or electrician, then it’s what you make engineering or electrician-ing (I don’t think that’s a word). Remember, most of the time this is based on some type of payment structure whether it’s an annual salary, hourly rate, or commissions. In other words, either as an employee or self-employed individual, you have to trade your time for money in order to receive it.
Related article: The Importance of Time Value of Money
Now, there’s nothing wrong with this as it’s the first source of income that most self-made millionaires have. You got to start somewhere, right? But again, it’s also risky to go through your entire career relying on active income as the only source for your family. Also, while some jobs and careers pay well, it’s going to be very difficult to retire from one income stream as opposed to multiple streams of income.
Don’t get me wrong. I’m not saying it can’t be done. I’m looking out for you!
What I am trying to say is that you should consider earned income as a way to build up other sources of income based on the other options below.
#2 Business or Profit Income
If you’ve started any businesses on the side of your regular (9-5 job), aka “side hustle,” then any income received would fall under the business income category. This could be one to multiple sources depending on your situation.
Unlike earned income from your regular job, business income can grow exponentially as your side businesses grow. What this means is that this type of income has the potential to build real wealth.
#3 Interest Income
More than likely at some point in your life, you’ve put money in a savings account or CD. If so, then you earned interest on your money which is a form of interest income. Many times businesses that tend to hold large amounts of cash will do so in accounts that pay them some type of interest income instead of sitting in a non-interest-bearing checking account.
More than likely this won’t be your highest-earning income stream, but it’s always a good idea to keep your savings in accounts where you’ll at least earn interest.
#4 Dividend Income
If you own shares in a company (stock), then you’re considered a part-owner.
For instance, if you’re a Tesla stock owner like I am, then both you and I have ownership in that company. (Maybe that’s why my wife had me buy her one last year 🙂.) As an owner, you could be entitled to receive a share in the profits generated which are paid as dividends.
If you’re already investing in retirement accounts such as in a 401(k), more than likely you’re receiving dividends (from dividend stocks) that are being reinvested in your account. By doing this, your investments continue growing in value, which allows you to earn even more income from these reinvested dividends.
#5 Rental Income
One of the most popular income streams that millionaires possess is rental income. This income is derived from the rent that tenants pay each month. Not only can rental property offer a steady stream of income, but there are also numerous tax deductions involved.
Related article: Depreciation: The #1 Tax Break For Doctors
Rental income can be derived from either active or passive investing. You must choose whether or not you want to be a landlord (active) or not. Either way, this income is one of the secrets to millionaires’ success.
#6 Capital Gains
Whenever you sell an asset such as a stock or your home, that difference between the amount you purchased it for and the amount it sold for is the capital gains. For example, if you purchased a home for $200,000 and sold it three years later for $250,000, the capital gain would be $50,000.
This type of income is subject to either long- or short-term capital gains tax. Typically, if you hold an asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.
#7 Royalties or Licensing Income
This type of income is paid by people to use something unique that you’ve created.
One of the more popular items is music. Artists earn royalty income whenever a radio station plays one of their songs.
What if you can’t sing or write music? Another way to earn this type of income is if you create an idea for a product or invention. Even if you have no money to develop an invention, companies will pay you for your idea.
Some people only earn a small amount each year from royalty income but others earn much more.
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3 Benefits of Having 7 Income Streams
#1 Risk mitigation
Whenever you set up your financial life to have income hitting your accounts from multiple different sources, it helps to lower risk.
This is why Dave Ramsey recommends investing in mutual funds vs single stocks. If stocks in a mutual fund go down in value, there are others that can increase in price thus helping keep the price from tanking.
Regarding your income, the same scenario rings true. We saw this play out first hand in early 2020 when the world began shutting down. Those of us that had only one income stream learned quickly that something needed to be done moving forward in order to keep money coming in no matter what happens.
#2 Pay off debt quickly
If you try to put out a fire with one water hose vs multiple hoses, which do you think would be best?
The same goes for paying down debt. You can become debt-free much more quickly if there are several sources of income to “put out your fires” rather than one.
#3 Give you options
If you plan on following what financial advisors recommend, you best settle in for a long career of getting rich slowly. There’s nothing wrong with this and if you love your job then I think you should keep doing what you love.
I’m not getting any younger and am going to need doctors to take care of me so keep working!
But if you want options when it comes to when and how you retire or cut back, then having multiple income streams can give you just that.
The Bottom Line
The entire purpose of creating multiple streams of income is that it’s an excellent way of earning more money and reducing risk.
Remember, we don’t want to put all of our eggs in one basket, right?
It doesn’t matter your education level or what your current income is now, it’s possible for anyone to create multiple streams of income.
If you are truly dedicated to building wealth for your family and generations down the road, then building up additional income streams and passing your knowledge down to your kids will be one of the keys to success.
Which income streams have you developed? What’s the next one you plan to add?