We want to gain wealth that we won’t need to go to work anymore. We want to live in a mansion. We want to own and drive a luxury car. We want to have the latest gadgets. We want to have a never ending holiday in a beach. We want to travel the world. We want that financial freedom that we always hear. Thus, we want to earn more. We want to look for more income.
What is your cash heaven? What are your streams of income right now? Are you currently working for salary? Living from rental income? How about living on interest from your money in the bank? Are you generating income from more than one stream? Which streams do millionaires and billionaires have? How can I increase my income?
Before I suggest money making suggestions, let me list down and give you a better understanding of different types of income. By knowing these types, we’ll understand and have a better grasp how we can get them. Here are the different streams millionaires use:
1. Earned Income.
Earned Income is the money that we earn in exchange for our time and effort. We usually call this as salary, wages, or compensation. If we came from a poor family, this is usually the starting line. We finish education, look for a job, earn money, then start to live comfortably. In most cases, jobs pay us enough to live just enough for us not to be broke. For us to easily remember, job is Just Over Broke. But hey, we still live comfortably.
However, there is a danger in this comfort. Since we trade money for time, our quality of life will be bound to our desks or stations. Since we a) live in comfort and b) have few/no time, it is difficult to look into other income streams. This keeps us away from living in Cash Heaven. This is the type of income where people usually end up for decades.
2. Profit Income.
Profit Income is the money that we earn by selling products or services more than it costs us. Businesses sell goods or services at a profit. We may even sell products online or in person to gain profits. Thus, we need to be an entrepreneur to generate profit income.
We usually want to be an entrepreneur. We want to have the freedom with our time, as we usually see with the owners of the company we work for. However, that is not the case, it requires different types of skillsets and huge capital. Those who came from jobs will need to learn new skillsets to establish and run a business. We might also be limited with capital due to the family constraints and needs.
If we are still limited in the capital department, note that we may start small business with small profit. However, this will consume most of our time and effort, at least in the initial stage. We usually fail here, but that’s okay. Most of the successful entrepreneurs today experienced failure before. We can minimize the risk of failing and grow the business further by educating ourselves or seeking help from experts in business.
Compared to other income types, Entrepreneurship requires different mindset and risk management. It is very rewarding and can scale very well. I’ve done the transition from Job to Entrepreneurship. Everyone can do it. If you need help, you may send me an email email@example.com.
3. Interest Income.
Interest Income is the money we earn by lending our money to someone else. This may be to another person, putting it in the bank, or even lending it to the government or corporations in the form of bonds.
Lending to people will have a huge risk of loss. There is the risk of lenders running away with your money. Especially in the Philippines where non-payment of loan is not punishable by law, unless you sign a promissory note or contract. It will even be costly to chase your lender. This is a high risk, high reward move to loan a person as you can impose higher interest rate.
Putting it in the bank and lending it to the government or corporations is a great source of income. Active involvement here is not needed, meaning you don’t need your time and sweat to earn this. All we need here is capital. Most people will doubt the seriousness of this income, but with the power of compounding and the fact that it is really passive with almost no risk makes it beat any of the active incomes above. Combined with a very huge amount of capital, you can literally live on interest.
4. Capital Gains.
Capital Gains is the money you get as a result of the increase in value of assets that you own. There are a lot of options if you want this type of income such as a) Stock Market, b) Commodity Market, c) Currency Exchange, and d) Real Estate Property.
For example when you buy shares at 10,000 and sell them at 11,000 – the 1,000 is capital gains. If you buy your house for 20million and sell it for 22million the 2million is your capital gain. There are different tax laws in different countries on capital gains. We will discuss them in future topics.
5. Dividend Income.
Dividend Income is the money we get from being a shareholder of a business. It is almost the same as profit income, (you get share of profit). The only difference is that you don’t have to put your time and effort. We may get it from stock market listed companies, or even start-up companies. For start-up companies, you bear the risk of losing your money when the business fails or gain as much profit possible if the business succeeds.
For stock market listed companies, dividends are declared by these corporations. We get dividends when we own the share on the ex-dividend dates. If we buy the shares on or before the ex-dividend dates of these corporations declaring dividends, we can have better returns from Dividend Income than what we get from the Interest Income. This also gives us capital gains since the share price usually goes up in these times of dividend declaration. I highly recommend this type of income in getting good cash, based on our capital of course.
6. Rental Income.
Rental Income is the money we get from renting out our assets that we have. We can rent out our car, clothes, tools, basically anything we own as long as someone somewhere will need it and is willing to pay for its use. Although the most common asset used for this type of income is a house or building.
Most assets have depreciation when being used, which is why we rent it out for money. However, houses or buildings usually appreciate in value which makes it the most common among all other sources of rental income. The best thing is that it can be a regular passive monthly income.
This is a good source of income, but this still has its own drawbacks. Unlike other sources of income, we will need the most capital here. A property such as a house will mostly take a lifetime for us to be able to purchase if we are only relying from one source of income e.g., Earned Income. Another drawback is the liquidity of these assets which will only be a problem if we will need a lot more money than our emergency savings plus rental income.
7. Royalty Income.
Royalty Income is the money we generate by letting an individual or business use our products, ideas, or even processes. We earn a small percentage of the revenues they generate. They do hard work, while we just wait for our royalty income.
This type of income can be seen from franchising, writing books, or inventing a product. Franchising businesses usually earn based on revenues earned by the franchisor. This is in exchange for the use of their processes, logo, and marketing. For writing books, we get royalty for every copy sold. For a product, businesses such as manufacturing companies pay us royalty fee for our licensed inventions.
In this type of income, all hard work have to be put in at the start. The most challenging part is we have to create a unique and valuable asset. Then we can relax and wait for our royalty.
Now, let’s look at millionaires and billionaires. Warrent Buffet utilized Capital Gains and Dividend Income. Bill Gates utilized Profit Income and Royalty Income. Henry Sy Sr. utilized Profit Income and Rental Income.
To track our income, we can use a small notebook and record it in an excel. I suggest to use this format so we can easily organize these data using Pivot.
If you would not want to use paper and pen for tracking your expenses, we can use the power of Google Forms and Google Sheets to easily keep track of our finances. It will also be able to generate summarized informations such as Available Cash, Net Cash Flow and Net Worth with Balance Sheet and Income Statement.
There is no sure fire way type of income to get you to our cash heaven. Understanding these gives us the fundamentals for our stairway, it’s up to us how we build and use it.
Sky Cash Heaven is the limit.