Do you know what separates the rich and the poor? Simply put, it’s the number of ways both groups earn income. It is said that the average millionaire has around seven streams of income while the average person typically only has one and you guessed it, that one income stream is their job. However, as you’ve probably come to realize, jobs aren’t the best way to make a fortune which is why the rich depend on multiple streams of income to grow their wealth. They leverage both active and passive income to fuel their wealth generation engine and over time these streams are what build their sizeable wealth. The good news is that once you learn how the rich make money, then you can start to duplicate their strategies. As such, let’s dive into 7 ways millionaires make money!
Method #1: 9 To 5 Income
As I just mentioned, gaining your income solely from a job is not likely to make you rich but that doesn’t mean the rich don’t have their 9 to 5 job as a part of their income generation strategy. Now, their roles can vary from being mid-level managers to CEOs in corporate firms to doctor or engineers. Any and all of these roles work within the paradigm of trading time for money which is otherwise known as active income. In fact, this active income extends beyond a 9 to 5 job as it can also be tied to freelance work. This type of income is typically the starting point for many self-made millionaires. This is where the average person starts, and this is beneficial for a few reasons.
First, this is probably the easiest way to start making money and with this money you can invest into other ventures that will yield you a return and grow your wealth. Also, working a 9 to 5 job will help you work on skills like your interpersonal and problem-solving skills which will come in handy if you decide to start your own business. Now, there are also downsides to this method of making money with the first relating to trading time for money. We all only have so many hours in the day and when you work more to make more, you are giving up other activities in your life like family time, time to exercise or just enjoy life in general. Not to mention, if you start to get too comfortable in your job, you may never feel the need to strive for more money and will have to settle for whatever standard of living your job currently offers you.
Another huge downside is how much you get taxed when you earn employment income. Income tax in this category can be up to 40%, meaning that some people are literally giving back months of their hard work to the government which is not only discouraging but can demotivate you from striving to earn more money in this way. However, as I said this is usually a starting point, so the main thing is that you use the money you do take home from this form of income in the most financially fruitful ways possible!
Method #2: Profit Income
The second way millionaires make money is through profit income. Profit income is quite simply the generation of income by selling something for more than it cost you to make it. A simple example of this is a car. If it takes $10,000 worth of parts to make a car and you sell it for $20,000 then the profit you are realizing is $10,000. Now, the reality is that not many people use this type of income to build their wealth because they see this form of income as being restricted to only large businesses. And quite frankly, big business did dominate this space for a long time. Building a business that you could use to generate profit income would take a large initial capital investment from setting up a warehouse to sourcing products, hiring employees and of course marketing. Luckily, however with the expansion of e-commerce, has come the potential to make a ton of profit income without all this unnecessary overhead.
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 you source a product that you sell through your online shop that is already pre-made then the only effort you have to put in yourself is communicating with suppliers and ensuring your products are adequately marketed. This is generally how drop shipping and Amazon FBA shops work. However, if those options don’t appeal to you then you can take more a manual approach like buying items in your local area and flipping them online which is commonly referred to as retail arbitrage. Now, the rich generally opt for the former option of sourcing products and selling them rather than making the items themselves because as I said earlier, our time is limited and the more passive they can make their income streams the better.
Method #3: Interest Income
Generally, when people think of interest, they think of the never-ending interest charges they are subjected to by their credit cards. While this form of interest can work against you, there are ways to make interest work for you by adding it as a supplementary income stream. The simplest way to earn interest income is by collecting a return on money you lend out. Now, I’m not talking about the $500 you lent your best friend. It means buying bonds and letting someone use your money while you collect a small return for granting them this cashflow. Some common types of bonds that people buy are government bonds and treasury bills and while these financial assets don’t always offer the highest returns, they are a great way to offset your riskier investments to ensure you have a balanced portfolio. You see, the rich often invest in high risk stocks or private businesses and to ensure they guarantee returns and not put too much of their money at risk, they often diversify into bonds. Bonds typically yield anywhere from 1–4% which is enough of a return when you are using this asset as a hedging tool.
Method #4: Dividend Income
When a company realizes a profit, there are generally two ways they will use this surplus. Option number one is to re-invest the money back into the business to fund R&D, expand or buy back stock. The second option, and the one you want them to choose if you own their stock, is for the company to pay a dividend. You see, companies pay stocks to shareholders as a reward for them having invested money into the business and by having enough money invested in these dividend paying companies, you can begin to build a supplementary income stream. Now, depending on what type of dividend you receive, you can also take advantage of tax breaks when earning this form of income. Unqualified dividends will have you paying tax in the same way you pay tax on your employment income, but qualified dividends are different. If you earn less than $39,375 you are exempt from tax on any qualified dividend income you earn. For the rich, this is an easy way to make extra money. By simply investing their free cash into stable, dividend producing companies, they can collect their quarterly cash payouts with absolutely no effort required.
Method #5: Rental Income
It is probably no surprise to you that millionaires leverage the power of real estate to grow their wealth. However, when most people think about rental income, they think about renting out a home to a family or group of tenants. Sure, this is one way to go about it, but it certainly isn’t the only way to make this form of income. Many rich individuals also rent out commercial properties to businesses that need a space to operate out of. This is typically office space for their day to day operations. The other option is industrial real estate that is generally used by 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. When you think of rental income, just think lending out an item in exchange for cash. Again, this form of income tends to lean on the passive side. Sure, being a landlord can take quite a bit of work however this work can be easily farmed out to property managers, giving this form of income the ability to earn you money with zero involvement from your end.
Method #6: Residual and Royalty Income
Perhaps one of the less common ways of generating income, residual and royalty income stems from past work. This form of income epitomizes what it means to earn passive income. This could mean receiving money for a TV show you used to be a part of or from sales of your previously published book. Essentially, this is income stemming from work you did at a moment in the past that will continue to make you money over time. In fact, the article you’re reading right now is generating residual income. While this type of income doesn’t generally make up a large portion of a millionaires total income, there is no doubt that it can make you money and with it being quite hands off after the initial work is complete, it is a solid strategy to employ for those who want to minimize how active they are in their income generation game plan.
Method #7: Capital Gains
The final way millionaires make money is by buying and selling items for more than their acquisition price. Now, you may be wondering how this differs from profit income so let me explain. Capital gains are the result of a transaction where a capital asset is sold for more than its initial price. Capital assets generally include assets that are acquired for prolong use and that’s how they differ from the products that you buy or produce for resale that generate profit income. In short, the difference comes from their inherent nature. The most commonly seen situations where capital gains arise include when you sell real estate and stocks.
For the average person, capital gains become relevant in their lives when they sell their home. A home is a capital asset and when you sell it for more than you bought it for then you will trigger a capital gain. For instance, let’s say you bought a home for $200,000 and then sold it 10 years later for $400,000. The difference in the initial price and the sales price is $200,000 which is the capital gain. However, the taxable capital gain or the amount you would pay tax on would be anywhere from 0% to 20% depending on which income bracket you’re in. Not to mention, if you are selling your principal residence, you are exempt on your first $250,000 of capital gains meaning that in this particular example you could keep 100% of the profits from your sale. Now, generating income through capital gains does take some upfront capital and may be a form of income that you will generate later in your wealth building journey however it important to understand as it relates to many of the other income generation methods I just went over such as real estate and stocks.
And there you have it, the 7 ways millionaires make money that you can adopt to become a seven-figure net worth individual yourself!