Money 101: Streams of Income

The largest takeaway from the current Covid pandemic is that you can do everything correctly, and still find yourself without a source of income through no fault of your own.

At the time of writing this, there are millions of Americans who are struggling to stay afloat, and many more who are fighting to climb out of a hole they found themselves in. When most of the nation first sheltered in place starting in March of 2020, it resulted in millions of employees losing their source of income unexpectedly.

"Never depend on a single income."

~ Warren Buffett

Individuals who had jobs that were once deemed secure and "safe" suddenly found themselves at home, with no income to fall back on.

The shutdowns had a massive and adverse effect on a wide range of industries that had previously weathered previous economic downturns relatively unscathed.

Meanwhile, in the midst of all of the economic uncertainty and outright financial chaos, the wealthiest individuals actually INCREASED their worth by $1 TRILLION dollars over the last 7 months of 2020.

That mind-boggling nugget is due to the fact that the average millionaire has 7 streams of income.

Earned Income:

We're all pretty familiar with Earned Income. This is income that is earned from working a job. It is the compensation paid in exchange for our labor.

For a majority of people, this is the only income that they will focus on for the vast majority of their lives. And that is their biggest mistake. Because this income is intrinsically tied to the ability to work, if that ability is compromised, that then means income becomes compromised.

Profit Income:

Profit Income is generated from providing a product or service for less than you paid for it.

Most businesses are built on this income model. In essence, find a way to sell a product or provide a service for less than it costs to provide it.

Interest Income:

Interest Income is interest earned on money lent or saved.

Currently, most savings accounts pay a rate less than that of inflation, so that money still loses value, but money lent on peer to peer lending sites can net a tidy profit.

Dividend Income:

Some stocks pay shareholders a percentage of earnings as a perk of ownership of the company. This is known as a dividend.

At small increments, it can seem trivial, but dividend income adds up over time because it compounds. Especially if you elect to automatically reinvest your dividend payment into purchasing more shares of the stock that pays it.

Rental Income:

Rental income is earned from owning investment properties that are leased to tenants.

These tenants pay a monthly rent that should be enough to cover any outstanding obligations on the property, stash some in an account for any repairs or maintenance that needs to be completed, and ideally some cash flow once everything is paid.

Capital Gains:

Capital gains is the increase in the value of a capital asset such as real estate, stocks and mutual funds.

Capital gains are aren't considered to be realized until the asset is sold for an amount that is more than it was purchased for.

It is important to note that a capital gain profit isn't realized until the asset is actually sold. It is also important to mention that capital gains income is taxed at a lower rate than active income.

Royalty Income:

Royalty income is generated by allowing someone else to use your intellectual or artistic property, a process known as licensing.

The music industry is a very familiar example of royalty income, as many artists make money on the music they write and perform.

The book publishing industry is another everyday example of royalty income.

Royalty income is usually generated by someone else, who then pays for the rights to leverage your property for profit.