Eight Income Streams of Wealth Generation

2024-10-07 by Uncle Todd 164 Comments

The IRS breaks income into three types – earned, portfolio and passive. However, that is too simplistic for our purposes. If broken down not based on IRS qualifications, but by how the income is derived from the perspective of your activity to generate it, we have 7 types of income.

Earned Income       | You are a Worker           | You have a Job
Profit Income       | You are an Entrepreneur    | You have a Business
Interest Income     | You are a Lender           | You have a Bank
Dividend Income     | You are an Investor        | You have a Stock or Bond
Rental Income       | You are a Landlord         | You have a Real Estate property
Royalty Income      | You are an Inventor        | You have Intellectual Property
Capital Income      | You are a Trader           | You have all of the above
Inherited Income    | You are a Lucky SOB        | You have a Gift

Most wealthy individuals obtain income from more than one source and typically several. Thus, it’s a generally good idea to cultivate multiple sources of income across these eight categories. Each has benefits and drawbacks.

Time Horizon:

Short term equals income realized in less than 1 year
Long term is income realized greater than 1 year

What makes one better than another?

Hard Criteria (investment criteria)

Risk: Likelihood of losing principal investment (or more)
Passivity: Amount of work (or lack thereof) required to realize profit
Feasibility: Ability for any reasonable person to execute the investment
Liquidity: Ability to withdraw your investment and without penalty
Return: Ability to provide returns in excess of the risk-free rate

Soft Criteria (investor criteria)

Passion: How much do you (or need to) love to do this type of work
Expertise: How much specialized knowledge do you have (or is needed)
Patience: Amount of tolerance for delay, trouble, or suffering
Diversity: How varied a skill level do you need to be successful
Commitment: Level of dedication you have (or is needed)

Earned IncomeWorker | Job
- Trading your time for money
- Less risk, more comfort
Profit IncomeEntrepreneur | Business
- Selling something for more than it costs you to produce
- Difficult lifestyle, lots of hard work
- More risk, less comfort
- Tax benefits
- May or may not require significant capital outlays
- Long term hold strategy
Interest IncomeLender |Bank
- Lending your money to someone else
- Examples:
  - Peer to Peer (P2P) investing
  - CD / Money Market
  - Bonds
- Long term hold strategy
- Easier to do today with Micro lending platforms
Dividend IncomeInvestor | Stock
- Money that you get as a return on shares of a company you own
- Does not require significant initial capital outlays
- Typically, stocks, but can be bonds or other instruments
  - Stocks
  - Mutual funds
  - ETFs
Rental IncomeLandlord | Real Estate Property
- Renting out an asset that you have, like a house, or a building
  - Apartments
  - Houses
  - Boats
  - Cars
  - Machinery
- Typically requires significant initial capital outlays
- Capital outlays can be significantly leveraged with minimized risk
- Relatively illiquid
- Long term hold strategy
Royalty IncomeInventor | Intellectual Property
- Letting someone use your products, ideas, or processes.
  - Patents
  - Franchise
  - Book publishing
  - Music publishing
- Challenge to create something unique yet repeatable. Need special skills to create such an asset
- Once created, there is virtually no limit to the money you can earn
- Long term hold strategy
Capital IncomeTrader | all of the above
- Selling something for more than you bought it
- Examples
  - Real Estate (foreclosure and flips)
  - Business
  - Machinery
  - Other items
- Short term flip strategy
Inherited IncomeLuck SOB | Gift
- While most people only dream of inheriting “wealth”, it is a very real method of attaining wealth for some lucky folks out there.