An IRS Study Showed the Wealthy Had What?
Let’s learn what the IRS found regarding the wealthy so we can be wealthy too!
If you’re looking for the magic number of income streams that will make you wealthy, don’t worry, the math has already been done. According to the IRS, having 7 different streams of income is the perfect recipe for financial success!
There are more than 7 income streams but let’s review the top 7 according to the IRS. The 7 streams generally include Earned Income, Business Income, Capital Gains, Interest Income, Investment Income, Royalty Income, and Rental Income. Plus I added some bonus income streams at the end!
Each of these streams comes with its own unique set of pros and cons, so it’s important to think about each one before investing in any of them.
Never invest your money into something you don’t understand. That is how you will lose it quickly.
With the right mix of 7 income streams of your choice, you can create a bright and prosperous financial future!
Earned Income
Earned income through a W2 job is one of the most common forms of income. This type of income is typically consistent and predictable, making it easier to plan your budget and expenses. Additionally, taxes are automatically deducted from each paycheck, making it easier to stay on top of your tax obligations. Oh joy…
On the flip side, earned income, and the keyword here is “earned”, often means that you are trading your time for money. If you don’t work, you don’t earn and your income is limited to the salary you negotiate at the start of each job. Plus a W2 job is no guarantee and you could be fired at any time, whether you agree to it or not.
Business Income
Business income can provide a steady stream of capital, depending on the type and size of the business. It is easier to plan for future growth and expansion when the income is consistent. Additionally, there are tax advantages that come with owning your own business such as the ability to pay less taxes or no taxes at all!
BUT establishing and running a successful business requires a great deal of hard work and dedication depending on the type of business you choose to create. You will likely work more than you did at your W2 job but at least it’s YOUR business, right? And as with all ventures, it can be risky, as businesses are subject to market forces that can cause shifts in the demand for their goods or services. The COVID pandemic put a lot of small businesses out of business unfortunately.
Capital Gains
Capital Gains can be a great way to make money, as capital assets often appreciate in value over time. Selling your assets, which can be real estate, stocks, or mutual funds, at a higher price than when you originally purchased means profit from the sale. Additionally, capital gains are usually taxed at lower rates than other forms of income, like W2 income.
However, capital gains are subject to market forces, which can cause values to go down. And capital gains taxes need to be paid when the asset is sold, so it’s important to understand the tax implications before investing. I would always consult with a tax pro or CPA before selling off a chunk of assets. You do not want any surprises during tax time!
Interest Income
Interest income is generated when you loan out money to others, such as through a bank, like your savings account, or by being a private lender who charges interest. This type of income is typically passive because you don’t have to actively work for the money; instead, you simply receive interest payments over time. And again, interest income can be taxed at more favorable rates than other forms of income.
But interest income can be unpredictable, as it is often based on the performance of the financial institution. Unless you are a private lender and set the interest rate yourself in the agreement. Additionally, there is always a risk that borrowers may default on their loans, leading to potential losses if you are a private lender. If you have money in a savings account earning interest, then that’s less of an issue.
Investment Income
Dividends from investments, like stocks and EFTs, can be an excellent way to diversify your portfolio and create a steady stream of income. Dividends from investments payout on a regular basis, providing investors with additional cash flow. Or you can reinvest the dividends back into your portfolio since investments have the potential to gain value over time.
And like with all other investments, there is a risk and no guarantee that the investments will appreciate in value. Income from dividends may also fluctuate due to the performance of the underlying companies or the market as a whole. That’s why it’s important to maintain a diversified portfolio and not have all your investment funds in one type of stock or EFT. Investing in stocks is a long-term game.
Royalty Income
Royalty income is another great income vehicle if you are willing to do the work upfront. This type of income is passive in nature once you create the product or intellectual property and you simply collect royalties based on the usage. And of course, there are tax advantages!
However, establishing and protecting intellectual property can be a lengthy and expensive process. Royalties may also not be as consistent as other forms of income, due to the unpredictable nature of usage rights.
Rental Income
One of the great benefits of rental real estate is that it can provide a steady stream of income, month after month. Also, property values historically appreciate over time, so you have the potential to build wealth in addition to collecting rent payments each month. And once again, rental property owners benefit from attractive tax breaks!
BUT, and that’s a big but, rental real estate takes a significant amount of capital to get started, AND having rental property requires ongoing maintenance and management. That’s why, if you want this stream of income to be truly passive, you must hire a property manager. Lastly, you have to deal with tenants and there is always the risk of not finding a tenant or dealing with tenants who don’t pay on time.
If you’ve gotten this far, here are a few more streams of income…
Annuities
Annuities are a type of financial product that can provide you with a steady stream of income in retirement. This type of income is generally tax-deferred, meaning that taxes are not due until the money is withdrawn, similar to a 401K or Traditional IRA. The best part about annuities is they often guarantee payments for life, ensuring that you will have an income even if other investments fail.
However, annuities can be complex and expensive, as they often come with high fees and commissions. Annuity payments are generally fixed, meaning that you may not benefit from potential gains in the market. And typically have restrictions on when and how money can be withdrawn, so you definitely want to read the fine print before investing.
Affiliate Marketing
Affiliate marketing is a great way to generate income with minimal effort. This type of income requires you to promote products or services online, and you earn a commission from each sale that is made through your promotion. This type of income has no upper limit meaning, the more sales you make, the more money you can earn!
On the flip side, affiliate marketing can be a competitive business, and you may not always get the sales that you are expecting. There is no guarantee of success, as it can take time and effort to build up your customer base. Also, some affiliate programs may require upfront fees or other costs that need to be taken into consideration before investing.
Real Estate Syndication
If you love real estate but don’t want to deal with the headache of a rental property, a real estate syndication is a great way to invest without having to purchase, manage, and maintain the property yourself. This type of investment allows you to pool your resources with other investors, giving you access to larger and more lucrative deals than you would have access to on your own. Additionally, a real estate syndication can provide you with a steady stream of passive income.
And of course, real estate syndication is not without its risks, as the value of the property can go up or down over time, just like if you purchase a house. Additionally, there are costs associated with investing in a syndicate, such as legal fees, appraisal fees, and other administrative expenses.
By understanding the pros and cons of the different streams of income, you can make informed financial decisions that will help you achieve financial success and secure your future!
So what are you waiting for? Start diversifying your income today and make the most of your future. You’ll be glad you did! Good luck on your journey to financial freedom! Happy investing!
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