7 Types of Income Millionaires Have [How the Rich Make Money]

Summary

This video explores the seven streams of income that contribute to the financial success of the average millionaire, contrasting them with the single income source typical of most individuals. It covers earned income, profit income, interest income, dividend income, rental income, residual and royalty income, and capital gains. Each income type is explained, highlighting the differences between active and passive income, scalability, and tax implications, encouraging viewers to diversify their income sources for financial stability and growth.

Takeaways

• 💼 The average millionaire has around seven streams of income, while the average person typically has one, usually from their job.
• 💰 Earned income, the most common source, is active income where you exchange time for money, often with a high tax rate.
• 🛒 Profit income is generated by selling products or services for more than their cost, moving from employee to entrepreneur.
• 📈 Interest income is a passive form of income from lending money to banks, companies, or governments, typically with lower returns.
• 📊 Dividend income comes from investing in stocks that pay a portion of their profits to shareholders, often with a lower tax rate than earned income.
• 🏠 Rental income is generated by renting out property or equipment, and can be scaled from residential to commercial or industrial.
• 🎥 Residual and royalty income continues to pay after the work is done, such as from movies, books, or digital content like YouTube channels.
• 📈 Capital gains income results from selling assets that have appreciated in value, like real estate or stocks, and is taxed at a lower rate than most other income forms.
• 🔄 The script emphasizes diversifying income streams to reduce financial risk and potentially increase wealth, suggesting exploring multiple avenues for income generation.
• 💡 The video encourages viewers to consider which income sources appeal to them and to plan for adding new streams to their financial portfolio.

Q & A

What is the significance of having multiple streams of income according to the script?

Having multiple streams of income allows individuals to diversify their financial sources, which can lead to greater financial stability and potentially higher earnings. It also reduces the risk of being solely dependent on one income source, such as a job.

What is the first type of income mentioned in the script and what does it entail?

The first type of income mentioned is earned income, which is income received from working a job. It includes wages, salaries, and payments to independent contractors and freelancers, and is considered active income because it involves trading time for money.

How does profit income differ from earned income?

Profit income is generated by selling products or services for more than their production or purchase cost. It can be active or passive, depending on the business model, and involves moving from being an employee to an entrepreneur. Earned income, on the other hand, is the income from employment and is typically active.

What are the two types of profit income discussed in the script?

The two types of profit income are individual or small-scale business profit income, which involves creating or flipping products manually, and scalable profit income, which comes from establishing a business that can produce products at scale, often with the help of manufacturers.

What is interest income and how is it typically generated?

Interest income is generated by collecting interest on money lent out, such as through bank CDs, bonds, or Treasury bills. It is a passive form of income since it does not require active involvement after the initial investment.

How does dividend income work and what are the tax implications?

Dividend income is received by shareholders when a company distributes a portion of its profits. The tax implications can be favorable, with qualified dividends potentially taxed at a lower rate than earned income, ranging from 0% to 20% depending on the individual's income level.

What is rental income and what are some examples of it?

Rental income is income generated from renting out property or assets to others. Examples include renting residential or commercial real estate, renting equipment, or renting out personal assets like cars or musical instruments.

What is residual and royalty income, and how does it differ from other income types?

Residual and royalty income is income that continues to be received after the work is done, such as from the ongoing sales of a book or the views of a movie. It differs from other income types because it is often a result of one-time creative work and can continue to generate income indefinitely.

How is capital gains income defined and what are the tax rates typically associated with it?

Capital gains income is income from the sale of an asset, like real estate or stocks, that has appreciated in value. The tax rates for capital gains are generally lower than for other income types, ranging from 15% to 20%, and can be reduced or eliminated through certain strategies like reinvesting in real estate.

Why is it important to understand the different types of income mentioned in the script?

Understanding the different types of income is important because it allows individuals to explore various ways to increase their income and diversify their financial portfolio. It also helps in planning for taxes and leveraging different income streams for financial growth.

What is the potential downside of relying solely on earned income as discussed in the script?

The potential downside of relying solely on earned income is that it is limited by the amount of time one can work, which is finite. Additionally, it is often subject to high tax rates, and it does not provide a continuous flow of income if work is interrupted.

Outlines

00:00

💼 Income Streams for Millionaires

This paragraph discusses the financial strategies of millionaires, who typically have multiple income streams compared to the average person who relies on a single source, usually a job. It highlights the importance of diversifying income sources and introduces the concept of active versus passive income, as well as the tax implications of different income types. The paragraph emphasizes the limitations of earned income, which is often the starting point for many but can be limited by the amount of time one has to work. It also touches on the higher tax rates that can apply to this income stream, suggesting that exploring other income sources can be beneficial.

05:01

🏠 Exploring Diverse Income Streams

The second paragraph delves into various types of income streams that go beyond earned income. It starts with profit income, which is generated by selling products or services for more than their cost, allowing for a transition from employee to entrepreneur. The paragraph then discusses interest income, which comes from lending money and can offer a safer but less lucrative return. Dividend income is explained as profits paid by companies to their shareholders, with tax rates potentially lower than other income types. Rental income is covered next, detailing how it can be generated from real estate or other assets. Residual and royalty income is introduced as income earned after the work is done, such as from the ongoing sales of a book or views of a movie. Lastly, capital gains income is described as profits from selling appreciated assets, which can be taxed at a lower rate than other income types. The paragraph concludes by encouraging viewers to consider adding different income sources to their financial portfolio.

Keywords

💡Millionaire

A millionaire is an individual whose net worth or wealth is equal to or exceeds one million units of currency. In the context of the video, millionaires are highlighted as having multiple streams of income, which is a key factor contributing to their wealth. The video aims to educate viewers on how to diversify their income sources, similar to what millionaires do, to improve their financial standing.

💡Income Streams

Income streams refer to the various sources through which an individual or business receives money. The video emphasizes that the average millionaire has around seven income streams, as opposed to the average person who typically has one, usually from their job. This diversification is presented as a strategy for financial stability and growth.

💡Earned Income

Earned income is the money received for work performed, typically in the form of wages or salaries. The video explains that this is the most common starting point for many self-made millionaires, as it involves exchanging time for money. However, it also points out the limitations of this income type, such as a ceiling on earnings due to the finite number of hours in a day and high tax rates.

💡Active Income

Active income is income earned through active participation in a business or job. The video uses the example of earned income, where one must be physically or mentally engaged in an activity to earn money. This type of income is limited by the amount of time one can work, and it is often subject to higher tax rates.

💡Passive Income

Passive income is money earned with little to no effort by the recipient, often generated by investments or businesses that operate with little to no input from the owner. The video discusses how some forms of profit income, such as those from digital products or businesses with manufacturers, can become passive, allowing for scalability and less reliance on the individual's time.

💡Profit Income

Profit income is generated by selling products or services for more than the cost to produce or acquire them. The video explains that this income type is a transition from being an employee to an entrepreneur. It can be active or passive, depending on the business model, and it represents a way to move beyond the limitations of earned income.

💡Interest Income

Interest income is earned by lending money, typically through vehicles like bank CDs, bonds, or Treasury bills. The video describes this as a passive form of income since it does not require active involvement from the lender. It is generally considered a safer but less lucrative investment, with return rates often between one to four percent per year.

💡Dividend Income

Dividend income is the money paid to shareholders of a company out of its profits. The video explains that when one buys a stock, they become a part owner of the company, and if the company pays dividends, the shareholder receives a portion of the profits. This income can be taxed at a lower rate than earned income, providing an advantage to investors.

💡Rental Income

Rental income is generated from renting out property, equipment, or other assets to others. The video mentions that this can include residential real estate, commercial properties, or even personal assets like cars and instruments. It is another form of passive income where the owner receives money in exchange for the use of their asset.

💡Residual and Royalty Income

Residual and royalty income is earned after the initial work is completed, such as from the ongoing sales of a book or the views of a movie. The video uses the example of JK Rowling, who continues to earn royalties from the Harry Potter series, even after the initial creation of the books. This type of income is passive and can continue indefinitely as long as the product or property generates revenue.

💡Capital Gains

Capital gains income results from the sale of an asset, such as real estate or stocks, for a higher price than its purchase price. The video explains that this type of income is different from profit income, as it is based on the appreciation of the asset's value rather than the profit from its sale. Capital gains taxes are generally lower than other income taxes, making it an attractive form of income for wealth building.

Highlights

The average millionaire has around seven streams of income, while the average person typically has only one.

Income streams can be active, passive, or a mix, and can vary in tax implications.

Earned income is the most common and includes wages from jobs, but it is limited by the number of hours in a day.

Earned income is often the starting point for self-made millionaires but has a high tax rate.

Profit income comes from selling products or services for more than their cost and can be scaled with business growth.

Interest income is generated by lending money, such as through CDs, bonds, or Treasury bills.

Dividend income is received by shareholders when a company distributes profits.

Rental income can come from real estate or other property rentals, offering a passive income stream.

Residual and royalty income continues to be earned after the work is done, such as from book sales or movie royalties.

Capital gains income results from selling appreciated assets, often taxed at a lower rate than other income types.

Diversifying income streams can help mitigate financial risks and increase net worth.

Each income type has unique tax implications, with some offering tax advantages over others.

Digital products and online businesses have made it easier to create scalable profit income streams.

Investing in stocks that pay dividends can provide a passive income with potential tax benefits.

Rental income can be diversified beyond real estate to include equipment and vehicle rentals.

Royalty income can be collected from multiple sources based on the same intellectual property.

Capital gains can be reinvested to potentially eliminate taxes, allowing for tax-free growth of net worth.

Understanding different income types is crucial for financial planning and wealth accumulation.

Transcripts

it is said that the average millionaire

has around seven streams of income the

average person typically only has one

usually from their job which can put

them in a balloon low position

financially if you take a look at the

average millionaire it is true that they

have more than one stream of income

generating cash flow now not all types

of income are the same some are active

some are passive some are of mix of both

some are highly taxed and some can be

leveraged to not have any taxes at all

so today we are going over the seven

different types of income than the

average millionaire has in their

portfolio if you like videos about

business money in psychology make sure

subscribe and hit the belt button to not

miss any overvalue pact videos and let's

get started the first and most common

source of income is earned income this

is what you get from a job this includes

the average worker all the way to the

CEO many CEOs are still employees of a

company other professionals like doctors

or nurses are also included in this

category earned income is when you

exchange time for money which is what is

called active income this can also

include freelancers earned income is

typically the starting point for many

self-made millionaires this is where the

average person starts with and it's a

good way to get started especially if

your job allows you to provide for

yourself and your family but the

dangerous part is staying in this

category because this type of income

leverages your time which you have a

limited amount of you only have 24 hours

in a day like everyone else

so there is always a ceiling on how much

money can be made in this category this

is also one of the highest taxed forms

of income taxes in this category can go

all the way up to 40% of your income

meaning some people in this category pay

almost half of their earnings in taxes

depending on their income this is great

as a starting point but we must know

what other types of income are out there

the second stream of income is profit

income this is income produced by

selling products or services for more

than it costs to make or buy them this

is when we move from employee to

entrepreneur

in the past starting a business required

a significant investment to buy or make

the products but it has become much

easier in recent years with the help of

the internet whether you sell a physical

product or a digital product if you sell

a product for a higher price than it

takes for you to make or buy them you

are making profit income now this can be

both active income or passive income

depending on your business model if you

make things yourself and sell them then

it's more of an active income and a

little more difficult to scale but if he

create that the sign of the product and

you have a manufacturer created for you

or you make a digital product it has the

potential to become a passive form of

income there are two types of profit

income individual or small-scale in

business or highly scalable the

individual or small skill as when you

either create the product yourself or

flip products manually like on eBay or

Facebook marketplace and that is a great

way to add an additional source to your

income the scalable profit income comes

from establishing a business in having a

manufacturer for example produce your

products instead of doing it yourself

this way you free your time to focus on

other aspects of your company like sales

or marketing another recent example of

highly scalable business is by using

digital products since they do not

require your storage shipping or even

ongoing manufacturing digital products

are extremely scalable now these two

types of profit income are taxed

differently if you are an individual

flipping or creating your own physical

products in a small scale chances are

you will be taxed the same as earned

income but if you build a business you

might be able to take advantage of many

tax breaks by forming a company or a

corporation the third income category is

interest income you make interest income

by collecting interest on money lended

now I don't really mean lending money to

your friends this is typically not a

good idea but there are a few ways to

create this form of income from lending

money to the bank in a form of a bank CD

lending money to companies in form of a

bond or lending money to the government

and form of Treasury bills these are

typically safer ways to invest your

money but are not the most lucrative

many of these have between a one to four

percent return rates per year now there

might be a

few other ways to do it with a little

more creativity and higher returns but a

lot more risk this is a passive form of

income because in most cases your active

involvement isn't needed number for

dividend income dividend income is when

you invest in stocks that pay part of

their profits to their shareholders when

you buy a stock in a company you become

a shareholder whenever the company that

you invested in reports profits they

will send a check to their shareholders

typically every quarter as a shareholder

you are part owner of the company so in

companies that distribute dividends you

get a portion of the company's profits

now depending on what type of dividend

you have you can pay a lower tax rate

with qualified dividends if you make a

less than thirty eight thousand six

hundred dollars in ordinary income you

pay zero percent taxes on your dividend

income and it tops off at twenty percent

if you make over four hundred and twenty

five thousand dollars which is much

lower than earned income which can go up

to a 40 percent tax rate number five

rental income rental income typically

comes from buying real estate and

renting it out to other people now it

does not necessarily have to be home

rentals this can also include commercial

properties which is real estates that

can be rented to businesses or

industrial real estate which is rented

to manufacturers now rental income does

not have to come from real estate

specifically there are other ways to

create rental income at a smaller scale

for example many people rent equipment

for various industries or their cars or

instruments etc rental income is any

income produced by lending a property to

somebody else in exchange for money

number six residual and royalty income

this type of income is when you continue

to get paid after your work is done

whether you work in a movie that

continues to be watched wrote a book

that continues to sell or more recently

if you built a youtube channel that

continues to be viewed royalty income is

a form of residual income royalty income

is money you make by letting other

people use your ideas or properties to

make a money such as music or books

music artists for example allow

streaming services and recording labels

to produce and sell their property to

the public

therefore making royalties every time a

song is played or sold or when someone

buys a record is a similar thing when a

publishing company prints and

distributes a book as long as people

keep buying the book the author

continues making money now there can be

multiple royalties collected from the

same property a great example of this is

the author JK Rowling she did not only

make royalties from her book sales but

also from the adaptation of her books in

movies and merchandise based on her

characters even though it's been 20

years since the first Harry Potter book

came out

JK Rowling the author still collects

royalties as long as people are buying

merchandise renting or streaming the

movies or buying the books she gets

royalty payments because those products

are based on her original property

number seven capital gains capital gains

income is when an acid that appreciated

in value is sold the most common ones

are real estate and stocks but there are

many other assets for example if you

bought a real estate property for

180,000 and you sold it for 250,000 you

made $70,000 in capital gains income

same goes if you bought 100 shares of a

company at $20 a share and you sold them

at 120 you made ten thousand dollars in

capital gains now this is different than

profit income because you are not buying

or making a product and selling it for a

profit here you have assets that

appreciated in market value you don't

have much control over the value

increase but the great thing about

capital gains is that taxes paid on this

type of income are much lower than most

other forms of income capital gains tax

reigns between fifteen to twenty percent

depending on the amount earned and they

can go down to zero percent such as in

real estate in many cases if you use

your capital gains you got from a real

estate property and you reinvest them

back into the market you might be able

to pay no taxes at all you are able to

increase your net worth

tax-free when building our income most

of us know only one or two ways of

creating income but knowing the

different types of income and how they

are made gives us a better opportunity

of adding different sources of income

into our life question which source of

income sounds the best to you and which

one will you add to your

come next make sure to leave your

answers in the comments below I always

like to see what you have to say as

always thank you for watching and I will

see you in the next video