One of the best (not so secret) methods to building wealth is generating multiple streams of income. This strategy can help you earn more, fight against market fluctuations, and create a better financial future for yourself. And thankfully, there are many different ways to receive income!
Some methods require a large amount of your time and effort, while others can be completely passive. And there’s a whole income category in between that requires minimal or occasional effort and time.
If recent inflation, economic changes, and job transitions have made you nervous about where your income (and subsequent wealth) are coming from, then now is a great time to learn the many advantages of generating multiple income streams.
Benefits of Creating Different Types of Income
Creating diverse income streams can help financially savvy investors and savers increase their financial position and future. Developing some income streams requires more knowledge, financial prowess, and dedication than others, but learning how to build multiple streams of wealth can pay off handsomely.
Consider these great benefits:
- Increase your earning potential.
- Create flexibility to explore different careers and opportunities.
- Enhance your financial stability during market volatility.
- Reduce your liabilities.
- Prepare for a fruitful retirement.
- Spend less time actively earning an income.
Exploring 5 Different Types of Income
You certainly don’t have to create income from each of these categories, but it does help to understand and explore your options. Perhaps there’s something you could put in motion today that will benefit you for decades to come! Let’s start with the most common type of income: earned income.
1. Earned Income
This type of income can be in the form of wages where you receive an hourly rate for performing agreed-upon tasks. The more hours you work, the more money you earn. Oftentimes, working beyond 40 hours in a week results in overtime pay for additional hours.
Earned income can also be in the form of salary, where you receive a set amount of money every pay period (weekly, biweekly, monthly, etc.), but you do not receive extra money for working beyond your designated work week.
You can also receive earned income on a flat-rate basis, receiving a set amount of money for completing a project or task. Tips and commissions are also types of earned income.
Earned income can be a predictable and reliable stream of wealth, and it’s often how most people start their working years. However, with earned income, you will always exchange your time for money. If you stop working, the income immediately stops and you’ll no longer receive income from that source when you retire.
The money from earned income is also taxed quite heavily, anywhere between 10% and 37% depending on your total yearly income and filing status. As you explore other income sources, it’s usually best to keep your “day job” until you can slowly move away from exchanging your time for money.
2. Profit Income
Profit income, also known as business income, can come from business ventures where you sell a product or service for more than what it costs you to produce. This can become a passive form of income in some instances, particularly if you hire out the work to a contractor or employee.
This income can still be subject to hefty taxes depending on the tax structure of your business, but oftentimes, you can offset your tax liability by deducting business expenses.
3. Royalty Income
Royalty income can be earned when your intellectual property gets used in commercial settings. Royalty income can come from copyrighted materials, intellectual property, licensing, patents, permissions, rights, trademarks, trade names, etc.
If you’re the creative type, you can turn your ideas into a steady stream of passive income by creating or developing a book, song, blog, photograph, software application, illustration, and more.
The income may not be substantial at first, but if your work becomes popular and widespread, it can provide you with income without requiring more of your time, talent, and effort. Your royalty income will be taxed at your normal tax rate under miscellaneous income.
4. Capital Gains Income
You can receive capital gains income when you sell an asset, such as a stock, precious metal, collectible, equity, real estate property, etc. If the selling price is higher than what you bought the investment for, then the difference is your capital gain.
You only have a recognized capital gain when you sell the asset. For example, your rental property might appreciate by $100,000, but you only receive that capital gain income when you sell the property. This is called a realized gain.
Assets held for less than a year are referred to as short-term capital gains and assets held longer than a year are called long-term capital gains. The IRS considers capital gains to be portfolio income and you must pay taxes on it. The amount of tax depends on your income level and whether the gain is short-term or long-term.
Though technically considered portfolio income, capital gains income can be a healthy stream of wealth with the right financial knowledge and planning.
5. Rental Income
Rental income can be a fantastic addition to your portfolio because you can receive a consistent monthly rent payment, reduce your tax liability by deducting home maintenance costs, and own an appreciating asset.
The level of active participation required from the investor in renting out a property can vary greatly. Being a landlord can be quite an active process, requiring your time, skills, and attention. If you choose to outsource this responsibility to a property management company, owning rental property can become more of a passive stream of income.
To gain access to rental income, you typically need a large amount of capital and commitment to get started, but the opportunity to generate consistent income is well worth the effort.
Increase Your Personal Finance Knowledge with Five Pine Wealth Management
Your path to wealth and financial success is long and filled with numerous opportunities to increase your knowledge and skills. At Five Pine Wealth Management, we help our clients design a personalized financial plan, increase their financial literacy, and answer their questions along the way.
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