According to the IRS, here are the 7 most common sources of income for millionaires:
1) Dividend Income – Income from stocks, mutual funds and ETFs held in brokerage accounts
How do dividends work? When a company makes a profit, it can choose to reinvest the money back into the business or pay a portion of the profits to shareholders as dividends.
Dividends are usually paid quarterly and are taxed at marginal rates.
The more investments you buy that pay dividends, the more money you make.
What I like about dividends is that you can reinvest them to buy more shares, which entitles you to more dividends.
This is a beautiful thing!
This is the best form of passive income because you don’t have to do anything except reinvest the dividends you receive.
2) Rental Income – Money earned from renting out a property, whether it’s a home, apartment, commercial real estate, or storage unit
Rental income is passive because all you have to do is collect the rent check!
Of course, you’ll need to do some work up front to find tenants and manage the property, but once that’s taken care of, the money will start rolling in.
Rental income is a great way to build wealth because it is relatively easy to acquire and maintain properties, and the returns can be very high.
If you’re new to managing rental homes or investing in rental apartments, you can always invest in a REIT (Real Estate Investment Trust).
REITs are publicly traded companies that own and operate income-producing real estate, such as shopping malls, office buildings, and apartments.
They are a great way to gain exposure to the real estate market without having to deal with the hassle of becoming a landlord.
Another option is Fundrise, a crowdfunding real estate platform that allows you to invest in high-quality, high-potential real estate projects.
3) Earned income – income from work/side job
Earned income is money you earn from working.
This is the most common and well-known type of income, but it is also the least passive.
If you want to make more money, you have to work more hours.
There is no way around this problem.
However, there are ways to make your income work for you.
One way is to invest in businesses.
Owning your own business gives you the potential to make more money than working for someone else.
Of course, building a successful business takes a lot of hard work, dedication, and time, but it’s extremely rewarding both financially and personally.
Another way to make your income work for you is to invest it in assets that generate passive income.
For example, you can use the income you earn to buy rental properties or invest in a dividend stock portfolio.
4) Royalties – royalties on books, inventions, etc.
Royalties are fees paid to you for the use of your intellectual property, such as patents, copyrights, and trademarks.
For example, if you invent a new type of widget, you could sell the patent to a company, which would then pay you a royalty every time it uses your invention.
Or, if you write a book, you can sell the rights to a publisher and receive royalties every time the book is sold.
Royalties are a great way to generate passive income because you make money without having to do any work!
The key is to create something valuable that people want to use.
I experienced this firsthand in my book Financial Soldiers. I wrote this book years ago and still collect royalty checks.
5) Operating income – operating profit income
Operating income is the money you earn from running your business.
This can be earned income (if you are self-employed) or passive income (if you invest in a business).
Either way, this is the money you make from your business.
Business income can be very high, especially if you run it.
Types of businesses you can start:
• Service-based business: This is a business that provides services to customers. Examples of service-based businesses include landscaping, pet sitting, and home cleaning.
• Product based business: This is a business that sells products to customers. Examples of product-based businesses include online stores, brick-and-mortar stores, and food trucks.
• Franchise: This is a business based on an existing business model. Franchises are popular because they offer a proven business model and the backing of the franchisor. Examples of franchises include McDonald’s and 7-Eleven.
• Online Business: This is a business that can be run entirely online. Examples of online businesses include blogging, drop shipping, and affiliate marketing.
6) Interest income – income from savings accounts, bonds, etc.
Interest income is money you earn by lending money to others.
For example, if you have a savings account, the bank will pay interest on the funds in your account.
Or, if you invest in a bond, you will receive interest from the bond issuer.
Interest income is a great way to generate passive income because you make money without having to do any work!
The key is to invest your money in safe and secure investments that give you ongoing interest payments.
7) Capital Gains – Capital gains from the sale of highly appreciating assets
Capital gains are the profit you make when selling an asset for more than you paid for it.
For example, if you buy Tesla stock for $100 and sell it for $200, you have a capital gain of $100.
Capital gains are a great way to generate passive income because you make money without having to do so.
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