The internet said a typical millionaire has 7 sources of income. I don’t know if this is accurate, but I’m sure wealthy people have more than one source of income. Most of us start off with just one source of income – earned income. That’s how we start our working life. We go to school, get a job, and work hard to get promotions. I still remember the exuberant feeling I got when I saw my first real paycheck. It’s a great thing to work and earn some money. However, to become wealthy, you need to figure out how to generate income when you’re not actively working. That’s what wealthy people do. They let
their investments work for them instead of working for money.
The US tax return filing deadline is coming up quickly and it is a great time to review your income streams since you’ll have to do your taxes anyway. The IRS conveniently categorizes the various types of income you have. Let’s see what we had in 2015.
Multiple sources of income
1. Wage Income
This is the main source of income for most people. Mrs. RB40 is still working and it is a major source of income for our household. In 2015, I also had W2 income from the High-Tech antitrust settlement. I’m not sure why it’s earned income. I guess that settlement is related to my former employer so part of it counts as wage.
2. Business Income
I make some income from Retire by 40. Right now, all of the income is from advertising. If you’re curious about my online income, you can sign up for our monthly newsletter and see the break down. I’m not exactly sure how I would categorize my online income, though. If I stop blogging, the income will continue, but I’m sure it would decrease over time. I guess blogging income is 50% active and 50% passive at this point.
3. Interest Income
We had a very small interest income from our saving and reward checking accounts. The rate is low and I tend to invest rather than keep a lot of cash around. I also have some income from my P2P lending account at Prosper.com. The ROI of my Prosper account is much better than the rate at my bank, around 8%. Lastly, we have some interest income from our bond funds, but these are all in our retirement account so they are not taxed at this time.
4. Rental Income
Currently we have a duplex and a condo that we rent out. I manage the properties myself so it does take a little time. The rental properties are mostly passive, but I have to do some work occasionally. Recently, I had a tree trimming company out to trim the maple in the back and remove some dead arborvitaes along the fence. We decided to replace the arborvitaes with potted bamboos to help screen the property. So this past weekend, we split a pot of bamboo and planted some mint in the garden. That one sentence sounded easy, but it took us 3 hours to do. We carted an old pot of bamboo from our balcony and it was a struggle. That thing must have weighed 100 lbs. Anyway, we’re willing to put some work into the duplex because we plan to relocate there at some point. Also, the rental income shows up as negative income in our tax due to depreciation. That’s a nice side benefit to being a landlord.
5. Capital Gain and Dividend Income
I love my dividend portfolio. We managed to stay in the 15% bracket for 2015 so we did not have to pay tax on our dividend income. This is my favorite source of income, by far.
6. MISC Income
Another part of the high-tech antitrust settlement is in the 1099-MISC category. I’m not really sure why. The MISC income usually covers income from working as an independent contractor. Some of our online income is reported with the 1099-MISC.
7* Sold Used Personal Items
Mrs. RB40 was in charge of selling used personal items and she sold a few things in 2015. We’re covered for tax because you don’t have to report it to the IRS if you sold them for less than the purchase price.
How many sources of income do you have?
Those are the different sources of income for our household in 2015. It’s good to have a solid earned income, but you need investment income to become wealthy. The key is to save a significant percentage of your income and invest consistenly. This will create different streams of investment income which will compound over time. If you make a lot of earned income, but don’t have much investment income, then there might be a problem. This probably means you spend most of it and aren’t investing enough. That’s not good because earned income do not last. We all get old sometime and you can’t work forever.
Our most significant source of income is Mrs. RB40’s earned income, but that will change when she retires in a few years. Luckily, our expenses are at a reasonable level and we don’t need to replace her whole income to keep the same lifestyle. For 2015, our other sources of income just about covered our cost of living. The high-tech antitrust settlement gave us a shove to get over the finish line. That’s just a one off, though. I’m not too worried because there are other ways to generate some income to make up for Mrs. RB40’s paychecks. Here are some of them.
- Retirement plan withdrawal – Here are 4 ways to avoid the 10% early withdrawal penalty.
- Social security benefit – This one is a few years off, but I think it will still be there when we turn 65.
- Side hustles – Once RB40Jr. heads off to kindergarten, I will be able to side hustle more. I’ve been turning down paid surveys because I can’t attend at the specified time.
- Part time income – Mrs. RB40 might work part time or perhaps start a hobby business.
- Other residual income – Write a book?
Do you have multiple sources of income? What are some of them?
Personal Capital is a great site to help keep track of your income and expenses. Check them out if you have many streams of income and a complicated portfolio. They are very useful and I log in almost everyday to check my finance. You can sign up with Personal Capital through this link.
Disclosure: There are some affiliate links in this article and we may receive a referral fee if you make a purchase through these links.
Image by Fil.Al
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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