3600: [Part 1] The 7 Streams of Income to Get Rich by Nick Maggiulli of Of Dollars and Data on Financial Growth

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[00:00:54] This is Optimal Finance Daily. The 7 Streams of Income to Get Rich, Part 1 by Nick Majuli of OfDollarsAndData.com If you're looking to build wealth and financial stability, diversifying your streams of income can be a powerful strategy. By generating multiple sources of revenue, you can reduce your reliance on any single income stream and increase your earning potential over time.

[00:01:21] In this blog post, we'll explore seven different streams of income that can help you achieve financial independence and build long-term wealth. From passive income streams like real estate income and dividend stocks, to more active income streams like entrepreneurship and royalties, there are a variety of ways to increase your earning potential and secure your financial future.

[00:01:43] So whether you're looking to supplement your current income or build a sustainable long-term wealth plan, these seven streams of income can help you achieve your financial goals. Let's dig in. Number one, earned income. Earned income is the most common and traditional form of income that most people receive through their employment. Earned income is the money you get in exchange for the time and effort that you put into your job.

[00:02:08] This stream of income is often characterized by a fixed hourly wage, annual salary, or commission-based pay. One of the benefits of earned income is that it generally provides a consistent and reliable source of income that allows you to cover your basic living expenses and save for your future. This is also where most people start before building out other income streams in the future. However, the downside of earned income is that your earning potential can be limited by your employer, your industry, and your time.

[00:02:38] In addition, though earned income is consistent for most people most of the time, there's lots of risk associated with relying on it as your only source of income. In the event that you lose your job, it can be stressful if you have no other source of income. Nevertheless, if you want to maximize your earned income, you should focus on developing and improving your skills and expertise, networking with professionals in your industry, and pursuing career advancement opportunities.

[00:03:05] This may include getting additional education and certifications, seeking promotions or leadership positions, and or even transitioning to a higher-paying job or industry. Overall, earned income is where most of us start building out our income streams and an area that can't be ignored if you want to start building wealth. Earned Income Summary Pros Reliable, easier to obtain Cons Limited by Time

[00:03:35] Limited by Time Doesn't Scale Can Be Risky A Sole Income Source Number 2. Capital Gains Capital gains are profits that you make from selling an asset, such as stocks, real estate, or artwork, at a higher price than you originally paid for it. This form of income is often associated with long-term investing, and it's an effective way to build wealth over time. The amount of capital gains you can earn depends on the value of the asset when you sell it, and how much you paid for it initially.

[00:04:05] Additionally, if you hold an asset for more than a year before selling it, you'll be taxed at a long-term capital gains rate, which is typically lower than the tax rate you would need to pay on ordinary income. In fact, a single individual using the standard deduction in 2022 would pay $0 in federal taxes. Yes, $0 if their adjusted gross income was $54,625 or less and was completely from long-term capital gains.

[00:04:35] For married couples, this number jumps to over $100,000 in tax-free capital gain income when using the standard deduction. Of course, since most people generate earned income throughout their lives, this strategy is best for those in retirement who can sell down their assets without having to pay Uncle Sam. Another benefit of capital gains income is that it requires relatively little effort on your part once you've set it up.

[00:05:02] Though saving money to invest can be hard, generating capital gains after you've invested your money is a form of truly passive income that can help you build wealth. The big downside of capital gains income is that it can disappear quickly, especially for newer investors. Though markets tend to go up most of the time, during downturns, you can see your capital gains quickly turn into capital losses. Keep this in mind before relying on capital gains as a long-term income source.

[00:05:32] To maximize your capital gain income, you should continually invest in a well-diversified portfolio of stocks, bonds, and other income-producing assets, and then hold them for a long time. Capital Gain Summary Pros Passive, better tax treatment Cons Can disappear quickly, not as reliable, requires capital. Number three, interest income.

[00:06:00] Interest income is another form of passive income that's generated by lending money to others, typically through a savings account, money market account, certificates of deposit, or fixed income securities. This form of income can be a reliable and predictable source of revenue, as the interest rate is typically fixed and earned over a set period of time. One of the benefits of interest income is that it's generally considered a low-risk investment that provides a guaranteed rate of return.

[00:06:28] This makes it an attractive option for individuals who want to earn a steady stream of income without the volatility and risk of other investments. To maximize your interest income, you can shop around for high-yield savings accounts or CDs that offer competitive interest rates. You can also consider investing in government or corporate bonds, which can provide higher interest rates than traditional savings accounts. However, it's important to recognize that interest income is subject to inflation risk.

[00:06:57] While prices may rise, your interest payments are fixed, and if the rate of inflation is higher than the interest rate you're being paid, then the purchasing power of your income will go down over time, even if you're reinvesting that income. Lastly, interest income is subject to income tax, sometimes at both the federal and state level, which can further reduce your earnings. Overall, interest income can be a useful stream of income to supplement your other income sources as you continue to build your wealth.

[00:07:27] And with short-term treasury rates hovering around 5%, there's never been a better time in recent years to consider adding this income source to your portfolio. Interest Income Summary Pros? Passive, consistent, and predictable. Cons? Requires capital, small relative to other income sources. Number four. Hear that on tomorrow's episode.

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[00:09:54] We all know that we need to diversify our investments to help manage risk. Most of us aren't putting all of our money into a single stock because we don't want to put all of our eggs into one basket. But many of us don't think this way in terms of our income. A report from Logica Research stated that two-thirds of Americans only have one source of income, largely from W-2 employment. Income is a very important factor of the financial equation.

[00:10:21] On this show, we talk a lot about how to reduce expenses and how to invest, which are the other important factors to building wealth. But when it comes to focusing on factors you can control, that really boils down to increasing your income and reducing your expenses. Another aspect of multiple sources of income that I'm not seeing addressed in this article is that it can offer you some financial bandwidth to take risks. When I decided to quit my job in 2021

[00:10:49] and pursue self-employment and entrepreneurship, I had about a year of runway in my savings. However, I also had a bit of income from this podcast. It didn't cover my expenses in full at the time, but it did cover about half. So knowing that I had some income plus an adequate amount of savings plus achieving cost-wise status, which essentially means I front-loaded all of my retirement savings. All of that contributed to me having the confidence

[00:11:18] to take a leap into the unknown and walk away from a six-figure salary. But that's just the first half of this article, so be sure to come on back tomorrow where we'll finish up this post and where your optimal life awaits.