The first things that the middle class must understand about millionaires is that their millionaire status is measured in their net worth not their annual income, and most of them pay their bills through cash flowing assets not a pay check.
Does the average millionaire have 7 streams of income?
Yes, based on IRS reporting the average millionaire has 7 streams of income. In 2015, the IRS published a research study titled Over the Top: How Tax Returns Show that the Very Rich Are Different from You and Me, the study revealed most millionaires have seven streams of income.
What are the 7 sources of income for millionaires?
Capital Gains on Investments
Owning things that go up in value is a source of income when some of the investments are sold for a profit. This primarily refers to stocks and real estate. Stocks are much more liquid and easy to exit than real estate but owning homes and property can give an investor a huge amount of leverage. Whether capital gains are left to compound over years or an asset is sold to lock in profits, it’s a source of income for a millionaire when they exit.
Business Cash Flow
The millionaires that achieve a seven figure net worth the fastest tend to be the ones that build their own successful business. The leverage of fulfilling customers and employees needs by owning a business can create both high cash flow and also a valuable asset that can be sold later for a huge profit. This is not easy and requires many skill sets including marketing, people skills, accounting, taxes, legal, regulatory, and market research but can be one of the most financially reward endeavors.
Some millionaires receive income from rental properties. Owning high occupancy rental properties in popular areas can be very lucrative and you can also hire companies to manage and clean them. Airbnb has made this very easy to implement with their business model and app in recent years.
Also Turo has recently made it possible for people to operate a rental car business. Their model is basically like an Airbnb for cars and can also create great cash flow for car owners.
Royalties & Licensing Intellectual Property
Some millionaires made their fortune through best selling books, patents, or other types of intellectual property. This type of income can be very steady with consistently paid royalties each month, quarter, or year depending on the payment structure. This can be one of the best sources of cash flow as all the work is done up front and the pay can be ongoing for years and even decades.
Earned Income (Paycheck)
There are millionaires that continue to work a job they love. These are typically people that have the bulk of their net worth tied up in their stock portfolio and personal residence and don’t want to tap either yet for monthly expenses so they keep their job.
They can also be high-income earning executives that are passionate about their career and don’t have another endeavor to retire to. Millionaires do have the flexibility and financial freedom to decide to continue to work their job or quit, so their employment is a choice.
Stock Dividend Income
Income investors like receiving dividend payouts from their stocks. This pays investors for owning the stocks by sharing the company’s earnings with stockholders. Warren Buffett is not a fan of his company Berkshire Hathaway paying dividends as they are taxed twice for both the company and the investor.
Companies pay taxes on their corporate earnings and then pay shareholders dividends from their after-tax earnings. Individual investors receiving dividend payments from a stock must then pay taxes on that income on their own personal income taxes. Because dividends are subject to double taxation many companies don’t payout dividends and instead reinvest all their earnings back in the company’s growth to give the stock a higher valuation.
Buffett prefers to pay no dividend to Berkshire Hathaway shareholders and instead reinvest its earnings into the company and also to receive billions in dividends from the Berkshire stock investment portfolio it owns.
The best way millionaires can optimize their dividend payments for income taxes is to hold their income stocks in an IRA account. A Roth IRA makes sense when would-be millionaires are just starting out at a lower tax bracket, while a traditional tax deferred IRA makes more sense for high income earning millionaires.
Interest income on bonds and certificates of deposit (CDs) use to be a big source of income for many people before central banks around the world went to very low rates and even negative rates in some European countries. With the recent rising of interest rates to combat inflation bonds could finally be more of a source of income for millionaires looking for somewhere to park their money.
Interest income is starting to look more attractive for U.S. bonds at least because as bonds drop in price they rise in yield. There could be some good opportunity to lock in great bond yields at some point in the next year. This could help one of the millionaires income streams with new attractive prices and yields.
Where do millionaires keep their money?
Most millionaire’s money is kept in assets like the businesses they own, their stock portfolios, and real estate. They generally hold assets of value that cash flow and don’t hold a large amount of cash in the bank. They want to have their money is things that go up in value and not depreciating consumer goods like cars, boats, and motorcycles.
Many millionaires build their wealth in their area of expertise and then diversify into other investments and cash flowing assets to diversify and stay financially safe. Wealth is built through concentration, but wealth is kept through diversification.
Millionaires focus on owning things that pay them. They like assets with a high probability of going up in value over time and also ones that cash flow so they are paid for ownership. This is what primarily separates millionaires from the middle class, ownership of assets instead of going into debt for things that go down in value. Millionaires tend to build, buy, or create assets of value, this is where their wealth comes from.