Do you want to become a millionaire? If yes, then you must have many types of income streams. You must increase your cash flow as positively as you can. The ordinary people mostly rely only on one source of income while the wealthy people have two or more income streams. And if you want to become wealthy, you should also do what they are doing.
It is not questionable why most people are already happy with one source of income. This is primarily due to how we are being raised, a traditional way. Our parents will frequently remind us that we should go to school and study hard to have good grades in order to have an exceptional job.
However, landing on a good job today is not as easy as before. There are already many competent candidates. The competition is strong. And as a remedy to have an edge is to study more in order to have a higher degree of education. And the process goes on.
But this is not enough. Or should I say this is not the best solution in order to become a wealthy person? Instead, increase your sources of income. And to give you an idea, here are the different types of income streams that you can consider.
Earned Income
This is the most common type of income stream and the popular source of money for most of us. In this income stream, you trade your time for money. Since time is a finite resource, the money that you can make is also limited.
The typical example of this is your daily job. As an employee, you have a fixed salary rate – daily rate or monthly rate. If you do not go to work, chances are your salary will be deducted. On the bright side, there are two ways to increase your income in this set-up. One way to earn more is to work more. In other words, you need to do overtime work. The other way is to get a promotion so that your basic salary will increase.
But, the number one enemy here is tax. It has the highest-taxed in all types of income streams. In the Philippines, the personal income tax can be as high as 35%. You can use the DOF tax calculator to know the exact amount of your income tax. That’s why if you want to become a millionaire someday, you need to look for ways on how to reduce the taxes.
It is undeniable that when we have job, it makes us happy. It feel us more secure and satisfied since we can provide the necessities and even luxuries that we want our family to experience also. However, we also grow old. And as we aged, our energy declined and time will come that we can no longer perform our job.
JOB means Just Over Broke
That’s why I highly encourage you while you are presently relying ONLY on this income stream, look for alternative ways to generate more money. Otherwise, you will spend most of your time working and will never truly lived a prosperous life. Time flies so fast and it may be too late for you to realize that your children are now grown-up. That you were not able to spend quality time while they are young.
Profit Income
It is the selling of products or services at a higher price compared to its original cost. You are transitioning from being an employee to an entrepreneur. In this income stream, you can generate more money as your business grows bigger as long as you have the right system.
In order to be able to make money from this type of income stream, you need first to identify a product or services that you can offer to your potential customer. Remember, that it should be unique and can address the needs of the people in order to become successful.
Initially, it will not be easy and you will encounter failures but do not stop. Maybe you just need to make some necessary tweaks about your product. Perhaps you need someone to guide you who is knowledgeable in that type of business.
But it will require a lot of time, especially in the initial stages until you will learn how to manage it well. Nevertheless, in the long run, instead of trading your time for money, your product can be traded for money. And the more valuable your product is, the more customer you will have, the more money you can earn.
Interest Income
Basically, it is the money that you earn from lending or allowing another entity to use your funds. It is a passive type of income thus you are not required to actively participate. It can be a good source of earnings especially when supplemented with the power of compounding and it has the least amount of risk involved.
Why it can be a potentially good source of income? Let us consider compounding interest. In its simplest definition, compounding interest means that you also earn interest on the interest that you received as long as you did not withdraw. It can be annually, semi-annually, quarterly monthly, or even weekly.
For illustration purposes only.
Let say, you have a Php 100,000 with an interest rate of 10% per annum. From the original amount, you will earn Php 10,000 in the first year. Since it is compounding, in the following year it will become Php 121,000. Within 5 years, your money will become Php 161,051. For me, this is not bad. I didn’t do anything, I just leave it there. Instead of me working for money, the money works for me.
You just need to put your money in a high-interest rate with a shorter compounding frequency but make sure that it is legal. And the best way to take advantage of interest income is to start as early as you can even with just a small initial investment.
Some examples of interest income are treasury bills, bonds, and even money in the bank. Though the latter has a very minimal interest rate. So, I suggest that do not put your money in the bank unless it’s for your emergency fund.
Dividend Income
It is another type of passive income wherein the company’s’ earnings are distributed to you, as a shareholder from stocks or mutual funds that you own. Depending on the companies, it can be allocated annually and even quarterly and the rates of return will vary also from each company.
In the Philippines, dividend income is one way of earning from buying stock in the Philippine Stock Exchange. This happens when the company decided to distribute its profit to the shareholders instead of using it for expansion, upgrading their operations, or alike.
There are two ways on how it can be distributed. It can be in the form of cash or stock. Most companies prefer giving dividends in cash which will be credited to your account. Some will increase your number of shares depending on your investment. You can check the announcement in the Dividends and Rights under the PSE.
Rental Income
The rental income is the amount of money that you collected for renting your asset to another person or group of people. Some of the drawbacks are (i) the initial money required is huge and (ii) this is difficult to liquefy in case you immediately need money. But if you have other sources of money, you may be able to do so. An alternative way to compensate for the lack of capital is to apply for a loan but be sure that you have the capability to pay it to avoid indebtedness which can result in a bigger problem.
You can generate an additional income if you have a property like a house, apartment, condominium, lots, commercial space, and alike that can be leased.
What about the taxes? This is where the edge of rental income comes in. It is one of the least taxed among the types of income streams. Less tax means more money can go directly to our pocket. Another good thing is you can continuously earn money without necessarily selling your property. So, if you changed your mind and you want to personally use your property you can just inform the tenant.
Residual and Royalty Income
If you are a writer, a singer, or an actor then you can make money in the form of royalty income. What’s good about this income stream is you will continuously receive money even though the work required to be done is already completed. You only do the job once and you get paid for a lifetime.
How does it work? You let other people use your products, ideas, or anything similar by licensing it out to allow someone to use it for a fee. People need first to get your permission or consent before they can use your product or ideas since it is private property. This is what the copyright and trademark are about.
Royalties can be given to you in two ways. First is when you sell your work ( or property) in exchange for a constant percentage depending on the revenue they made. Second is, you will receive a royalty any time someone uses your property to make money (referred to as licensing).
A good example of this is Michael Jackson. Did you know that even though he is already dead he still generating income? That’s why having royalty income is so impressive. So, if you have a bright idea, a poem, a book, or anything that is of high importance, unique and valuable, try to consider making a royalty income from it.
Capital Gains
Capital gains are the money you get between the difference of the purchase price and the sale price of an asset. Meaning there is an increase in the value of the asset that you bought but the gain is not realized until you sold the asset. Capital gains are generally associated with stocks and funds.
For instance, you invested in mutual funds worth of Php 50,000. The purchase price of NAVPS is Php 2.00. After 3 years, you decided to sell your shares and the sale price of NAVPS is Php 5.00. Let us compute how much you were able to earn within 3 years.
Amount of Investment: Php 50,000
NAVPS (Purchase Price): Php 2.00
Number Of Shares: Php 50,000/ Php 2.00 = 25,000
NAVPS (Sale Price): Php 5.00
Fund Value: 25,000*Php 5.00 = Php 125,000
Total Earnings: Php 125,000 – Php 50,000 = Php 75,000
You were able to earn Php 75,000 within 3 years. Though this is just an assumption and it is not guaranteed since there is no assurance on how the market will perform. Remember, this is just for illustrative purposes only. And to know more about this, you can visit my article regarding FAQ about mutual funds.
Bottom Line
Relying only on one income stream is not enough if you want to achieve financial freedom. You should also consider the other types of income streams while you are still depending on a single income. Increasing your financial knowledge first is the key. Soon you will realize that working hard is not enough that you also need to work smart.
As a tip, use your earned income as a stepping step to gradually built other sources of income. You need capital to be able to have an additional source of income. While saving for money, search for other types of income streams that you think is compatible with you. Do research and study first before venturing to any investments.
And for you to be able to live the life that you wanted and to do the things that you loved, look for alternative ways to do less work while generating more money. Our time is limited and trading it for money is not a good way to spend it.