Let’s talk about money. There’s one thing that self-made millionaires know more than anyone else, which is the importance of having more than one income stream. Let's go over the seven types of income streams that the majority of millionaires have, and which income streams are easiest to start right now.
So what’s the difference between active and passive income? Active income is when you do work and you’re paid for that work. For example, if you have a part time job at a restaurant, you’re only paid for the hours you work. If you have a salary job, you only get paid for the work you do within the year. Of course, this is probably nothing new to you since the majority of us were taught that we needed to focus on going to school, getting a degree, and getting a job. The problem with active income is that we have to trade our time for dollars. If we stop working for this income stream, we don’t get paid. If you’re sick or have some sort of emergency, and you don’t show up to work at your part-time job, your boss isn’t going to pay you. If you don’t show up to your salary job, sure, you might be able to use your sick days, but you’ll eventually run out and not get paid anymore. Or worse case scenario, if you get laid off or fired, your income stream shuts down.
This leads to why it’s important for all of us to develop some sort of passive income just in case we aren’t able to work anymore. Well, what is passive income? Passive income is when your payment isn’t directly correlated to your active work. This doesn’t mean that you don’t have to put in any work at all. You might have to put a little to a lot of work in the beginning of setting up your passive income stream. However, once you’ve put in the work, your income will just come in and won’t be directly tied to the hours you work. Just to note, active income and passive income is not necessarily a dichotomy because many income strategies can fall somewhere in between the two.
1. Earned income, or income from working at a job.
Like what I mentioned before, having a traditional 9-5 job is usually a form of active income. Having an active earned income isn’t necessarily bad because this is usually the starting point for people making money. When I first started working when I was in college, I had a couple different jobs, like working at American Eagle, GNC, and as a private math and science tutor. As I finished getting my undergrad degree, masters degree, and teaching credential, I became a public school math teacher and taught in the classroom for 7 years. After you get comfortable consistently making money and understanding the value of your time, you can slowly branch into creating other income streams, which is exactly what I did.
2. Profit income
I know that a lot of financially free individuals branched out into developing a profit income because they wanted to have a side hustle along with their full-time job. So what’s profit income? Profit income is when you sell something that you paid less to buy or create in the first place. I had a friend who was good at making candles and she sold her candles on Etsy and her personal website. During the start of the Coronavirus pandemic, there were people who were good at making face masks and they made a small business by selling their products online or in their community. I had a teacher friend who made a business by buying mass quantities of school supplies, packaging them into cute boxes, and selling them to elementary school parents who didn’t have time to buy their child’s supplies individually. I also know that a lot of people go hunting for treasures at Goodwill and sell their curated products online or at swap meets with at least a 300% markup. You see, there are a lot of ideas of how to have different profit income streams. You just have to be creative and strategic in seeing what is in demand and how you sell your products. With profit income, I still see it as more of an active income because you still have to do work buying and selling products. However, if you can scale your business and maybe even hire people to help you, you can slowly transition this active income into a more passive one.
3. Interest income
Interest income is when you let someone borrow your money, and in return, you get paid a little interest. Some examples of this is when you lend your money to a bank, corporation, or the government by buying a CD, bond, or treasury bill. Or you can even let your friend or brother borrow some money from you and pay you interest, but I don’t think people really do that on a consistent basis. However, the most common example of interest income that you probably know of is when you let your bank borrow your money when you deposit your money in a savings account. Some saving accounts can pay you up to a 1.5% interest rate per year, meaning that if you put $10,000 into your savings account, you can get paid $150 per year. I think it’s good to have some of your emergency fund in a high-yield savings account, just in case something happens. I also believe that putting your money in a savings account is one of the most passive types of income streams you can have because you literally don’t have to do anything once you deposit your money in the bank. Is leaving your money in a savings account the best way to grow your wealth? I personally don’t think so, which leads me to the fourth income stream:
4. Dividend income
When you buy a dividend paying stock or ETF, like Apple or SPY, and get paid a little money each quarter, you receive what's known as a dividend. Some companies can pay you 1-5% each year, and this doesn’t even take into account the growth of the shares itself. And as the saying goes, there is no such thing as a free lunch. By being a shareholder, there will be price fluctuations or volatility. However, in my opinion, I believe that if you invest in companies with strong fundamentals and technicals, and pay you a dividend, this is one of the best ways to grow your wealth over the long term. I believe that dividend income is one the best passive income streams that anyone, including you, can start creating right now.
5. Rental income
Some people buy property and rent out a house to families or to individual people to live in. With the rent they collect, they use that to pay the mortgage, property tax, and anything else they need to cover for the property. After a couple of years, they’re able to pay off the house with all the rental income they collected and they’ll be making even more money now that their mortgages are paid off. But let’s be real here, not all of us are financially able to just go out to buy property to rent to others. Instead, some people have an extra room in their home that they usually use as storage, a guest room, or a work room and they clear it out for someone to live in. You can make an easy $500 - $1500 per month, depending on the size of the room and location of your home.
Just to note, we’re not sponsored by any of the following companies, but if you don’t want someone living with you for a long period of time, you can also consider renting out your room on specific days that you choose by using AirBnB, and make an easy $50-100 per weekend. But what if you don’t have an extra room? You can also consider renting out some of your belongings. Some people use the app BURO, which you can use to rent out things like camping gear, bikes, skateboards, snowboards, camera equipment, or video games. You can make an easy $10-50 per day just by renting out things you don’t need or use on a consistent basis. The money you get from renting out your stuff can probably even cover more than what you paid for the items itself. If you work at home and don’t use your car or motorcycle often, you can also rent that out using an app called Turo or GetAround and make around $300-500 a month. With rental income, it could be active or passive, depending on what you rent out and who you rent out to.
6. Capital gains
This is my personal favorite income stream and is the result of the increase in value of an asset. An example of this could be you buying and investing in your house for $500,000 and selling it for $700,000 in a couple of years. My favorite example of capital gains is when I buy stocks and sell them at a higher price, which is one of my ways to getting to financial freedom. The idea is simple: I typically buy around 100 shares of a $100 stock and sell them for a dollar more, meaning that I make $100 in a transaction. Not only can I buy and sell stocks, I can sell covered calls against my 100 shares, and consistently make around $250-$300 per month, or a 2.5-3% return on my investment. And, it gets better from here because if the shares I own pay dividends during that month, I can also make around an additional $50.
If you’re brand new to the stock market and would like to learn how to invest in stocks and sell covered calls, we have a free introductory course right here on this site. I teach this course coming as a public middle school math teacher and keep things super simple. One of the biggest misconceptions is that people think you have to be super smart, good at math, and have all these computer monitors to invest and trade in stocks, which is so far from the truth. My team and I teach that as long as you understand the fundamentals of a company, have a smartphone, and know basic elementary school math, you can easily make a couple hundred to a couple thousand dollars each month.
7. Royalty income
Royalty income is the money you get as a result of letting someone use your products or ideas. For example, if you have a Subway franchise, you would pay royalty fees to Subway for using their procedures and branding. If you are an author of a book, you would consistently get paid for every copy one of your books is sold. If you’re an actor for a movie, you would get royalty income each time your movie is played on TV. Bill Gates, who used to be the CEO of Microsoft, gets royalty income streams from the company selling his Windows products.
So, to summarize, the 7 income streams that most millionaires have include earned income, profit income, interest income, dividend income, rental income, capital gains, and royalty income. I want you to take a moment right now and have a little reflection time. Which income streams do you have? Are you safe and comfortable with that or those income streams? Are the majority of your income streams active or passive? These are challenging questions, but it’s important that we ask these questions to ourselves because we don’t know what could happen to us or our families in the future and we want to be financially safe. If you’re new to all of this, it’s totally okay! We are already proud of you in taking the first step in educating yourself and sparking curiosity.
Here at www.calltoleap.com, we strive to educate the ways to get to financial independence. If you want to learn, sign up for free to access the Intro courses and if you want to take it a step further with selling covered calls to generate income, sign up for our standard membership here!