As kids, we were all told to follow our dreams and the money will follow, but the majority of us were only taught to work a 9-5 until we can’t anymore. But in order to actually reach true wealth, it’s important to know the different types of income streams that are possible.
Did you know that only about 8% of the population are millionaires? Compared to how many people there are, this is not a lot at all and it paints a picture to those who wish to be millionaires that it’s simply a far-fetched dream.
One of the main setbacks for most people is the narrative of chasing one job and being really great at it. They don’t teach us that in order to be wealthy, we need to have multiple income streams.
But, over the past year, many people have become more aware of attaining multiple streams of income and not relying on one source due to the consequences of the pandemic.
Although the pandemic was a rough time, it was also a time of awakening that many of the general public needed.
If you are on a journey to become financially free and to generate multiple income streams to live your life on your terms, then you are in the right place!!
Before we talk about ways to get rich, we have to first educate ourselves on the fundamentals of making money!
So, let’s go back to building wealth basics and discuss the different types of income streams we can all generate.
Having an understanding of the different types will be helpful in your financial journey because it will help you to better understand what you want for yourself & will help to define what your next steps should be!
Now, let’s get into these definitions!
The 3 Types of Incomes Streams
Robert Kiyosaki said in order to reach true wealth, you have to be aware of these types of income and how they all relate to cash flow.
By being aware of them and by creating cash flow, he became a multi-millionaire.
The three types of income are earned, portfolio, and passive income. Let’s dive deeper into what each of those mean.
Earned income is the most common income streams that everyone knows about and tries to achieve first.
This type of income is received for exchanging time for money. This can be your typical 9-5 or it can even be your small business that you just started.
Some people believe that once they create a business that they aren’t earning this type of income, but in reality, when you first start a business you are putting in a lot more time than you might have put into a regular job.
This income stream is the most taxed out of all of the ones listed at 50%!! That means that for all you make in a year, half of your paycheck pays for taxes!!
I know… it’s hurtful!
Pros vs. Cons
The positive thing about earned income is that it’s the most stable out of all the income streams and promises a constant check as long as you are working.
The downside to earned income is that most people who only rely on this one stream often live paycheck to paycheck because most jobs don’t pay enough to live beyond our expenses.
And even if you do end up getting 6 figures or more in earned income, you still have to pay half of your profits to taxes.
Example: If you get paid 70,000 annually, when taxes get taken out, you are realistically getting 35,000.
If you get paid 150,000 annually, you are getting paid 75,000 once taxes are taken out.
So, the more you actually make, the more the government takes sadly.
One other downside is that if you only have one job and a crisis happens, many jobs will let people go and this will leave you with no money coming in.
This is one lesson many of us learned in 2020 and this doesn’t mean having earned income is bad, it just means we should look into depending on more than just this type of income in case we aren’t able to trade our time for money.
Next is portfolio income which can also be known as capital gains income.
This is any type of profit from the sale of an investment.
This could mean buying a house at a lower price and selling it at a higher rate later.
This could also count as any investment into stocks. People buy stocks low and sell them high to make a profit and that is a very common form of capital gains.
This type of income is still taxed on the higher side at 20%, but it’s not as detrimental as earned income.
Therefore, if you buy a house for $70,000 and sell it for $100,000, your profit is $30,000 pre-taxes. After taxes, you would get paid $24,000.
Pros vs. Cons
The positives of portfolio income is that if you play your cards right, you can make a lot of money in a short amount of time.
This is also a great way to transition if you have only made money from earned income because it doesn’t take too much education to learn how to successfully earn money this way.
The cons of this income stream is that it’s more risky than earned income. It can be hard not being guaranteed money back especially if you are making an upfront investment.
To reduce the amount of risk, you have to educate yourself in whatever type of capital gain you are most interested in.
The last source of income is passive which is money that comes from assets that pay you whether you work or not.
This is the infamous income stream that allows you to make money while you sleep.
A few examples of passive income are owning rental properties, having a profitable business that can be run without you, or the creation of a product that pays you in royalties such as books, downloads, courses, etc.
This form of income can legally be taxed at 0%…
Yes that is CORRECT… ZERO PERCENT!!
That means you could keep all your profit!!
This is possible because when you have profitable assets, you are helping to create more jobs which the government favors.
Therefore, you could write off many of your expenses on your taxes to where you won’t have to pay any!
This is known as passive income tax benefits and if you want to know more about how that works, click here!
Pros vs. Cons
The best part about passive income is that you will have more time to do what YOU want. Without the burden of having to invest all your time to make sure you make a profit is not a requirement with this income stream.
With having more time on your hands and being able to keep more of your money, you also can use that money to invest back into more passive income streams!
Just keep the cash flow cycle going!!
The downside to passive income is that it may take longer to achieve and requires a lot of patience. It also results in a lot more rejection along your journey which is hard to endure.
So, this type of income stream is the hardest to achieve, but once you achieve it you can find a system that works for you to where you can have money coming in every month no matter where you are.
All in all
Knowing the possible types of income you can generate is one of the first steps to getting your wealth journey started!
Building awareness within yourself will start to open up your mind to more possibilities and will begin to open up your creative nature!!
Now that you know the types of income you could create, sit down and make a plan for what you want for yourself.
This post was simply informative and in no way is saying you should choose one income stream over another.
The main thing is that you should work towards having more than one of these streams to ensure you are able to live on your terms and enjoy life how you want without having to worry about losing money.
By having at least more than one of these, you are bringing in more cash than you would have with just relying on one… so just do it!! You got this and I am rooting for you!!
Now that you are aware of the different types of income, what income stream(s) do you currently have and are you planning to build more income streams after this post? Let me know in the comments!!
I hope you found this post helpful and if you know someone who should start learning about building wealth, make to share this with them or post it to your socials!!