You heard right if you’ve heard the average millionaire has 7 streams of income. But is it always 7 streams? Could it be less?
It could be, but the more active and passive income you have, the easier it is to build wealth. Multiple streams of income take the pressure off one income stream, allowing you to pay your bills, cover the cost of living, have fun and still save for the future, including retirement, paying for college, or buying a house.
What Is an Income Stream?
An income stream is money you bring into your household. It could be active income or passive income. Ideally, you’d have some of both to round out your income streams and reach the desired 7 streams of income to achieve financial independence.
Passive vs. Active Income Streams
Understanding passive vs. active income streams is important because it helps you choose the right income streams to reach your financial goals.
A passive income stream is an income you earn without doing a lot of work. Notice that we didn’t say “no work” because some work is involved, especially upfront. However, once you get the income rolling in, it becomes passive income with little to no work required.
Active income is income you earn by actively working. Examples include working for an employer or creating your own income stream. The bottom line is that you provide a service or talents to earn money.
Check out our article on Wealth vs Income: What Is the Difference?
How Many Streams of Income Should You Have?
If you want to live like most millionaires, you need 7 streams of income. It sounds like a lot, but it’s not as overwhelming when broken down. Fortunately, they aren’t all active income streams, so you won’t find yourself working 24/7 without a break.
What Are the 7 Streams of Income?
1. Earned Income
Earned income is the money you earn from your job. For example, you might earn an annual salary, an hourly rate, commission, or money from self-employment.
You pay taxes at your ordinary tax rate on earned income, and you must report it to the IRS at tax time. With earned income, you pay taxes as you go with your employer withdrawing the funds directly from your income before issuing your paycheck and paying the taxes on your behalf.
If you’re self-employed, you pay the taxes to the IRS quarterly based on your estimated tax liabilities.
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2. Profit Income
Profit income is earned income from your business. Any goods or services that you sell and make a profit are part of your profit income. It’s harder to budget off this type of income because it’s not guaranteed. You must sell products or services at a profit to earn it. Most businesses see peaks and valleys in their business income.
3. Interest Income
Interest income isn’t something you should rely on with interest rates so low, but it’s one of the passive income streams that can add up and help you achieve your income goals.
Interest income can come from high-yield savings accounts, regular savings accounts, checking accounts (only some pay interest income), CDs, or money market accounts.
4. Dividend Income
Dividends are your share of a company’s profit when you own a part of it as a shareholder. You can earn dividend income from stocks, ETFs, and real estate investment trusts. There’s never a guarantee that a company will pay dividends, though, so don’t rely on it as your primary source of income, but add it to your multiple streams of income to reach the ideal 7 streams to reach financial independence.
5. Rental Income
If you add real estate investments to your portfolio, you can earn rental real estate income. This is money paid to you from tenants who rent the properties, whether residential or commercial.
Like most income streams, you shouldn’t rely on rental income as there is always the risk of vacancies or a tenant that defaults on their rent. However, you’ll likely pay mortgage payments (to finance the properties), property taxes, insurance, and maintenance costs from your rental income.
Any profits you earn from renting properties are subject to taxes, so keep that in mind as you price your rental properties since rental income is an ordinary income stream.
6. Capital Gains Income
You can earn capital gains when you sell an asset for more than you paid for it. For example, if you buy a home for $100,000 and sell it for $200,000, you have $100,000 in capital gains. You can also earn capital gains on other assets, including businesses, stocks, antiques, and art.
You typically pay taxes on capital gains as you receive them, so if you earn $100,000 when selling a house, you’d likely owe taxes on all or part of the money earned.
7. Royalty Income
If you have copyright content you can share, you earn royalty income each time the content sells. Take, for example, music. If you created a song and released it, you’d earn royalty income for the purchase every time someone bought a copy of it.
Even if you aren’t a musician or artist, you can earn royalty income on your ideas or products created using your ideas.
7 Streams of Income Examples
At first glance, 7 streams of income may seem too overwhelming, but here’s a real-life example of how it could look so you can see that it’s more possible than you realize.
John works a full-time job, working 40 hours a week, earning $75,000 a year. He receives a W-2 for his earnings there and pays taxes as he goes with this income. John also owns a small retail business where he sells products and earns a profit income from them.
John has some of his money invested in the stock market, real estate investment trusts, commodities, and even some money in a regular savings account and CD. He earns dividend income from some of the stocks and REITs, and he earns interest income from the savings account and CDs.
John owns three rental properties where he earns rental income, and he occasionally sells the properties to earn capital gains. Then he reinvests the money in other real estate investments to offset his tax liabilities and keep the rental income streams coming.
Finally, John came up with a unique business idea that he sells to business people that want to use the idea, giving him royalty income.
Benefits of Having 7 Streams of Income
Seven streams of income or multiple income streams help reduce the pressure on you to have enough money to reach your financial goals. Whether you want to be a millionaire or just want financial peace, having multiple streams of income help you achieve your goal while still being able to enjoy life.
You won’t have to rely on your earned income to get you through financial emergencies, forcing you to choose between paying your bills or taking care of the emergency. You also won’t have to worry about draining retirement savings or other money set aside for other instances just to get by.
With 7 streams of income, you have a much higher chance of building wealth and reaching your financial goals. You’ll think outside the box, take chances, and reap the rewards from doing so.
When you get caught in the mindset of the 9 to 5 rat race and only focus on that, you miss many opportunities around you to generate income, have capital gains, and even invest in the stock market to see much greater rewards than you’d get focusing solely on your job.
Read more about Wealth Accumulation in our complete guide to building wealth.
Challenges of Having 7 Streams of Income
Like any personal finance endeavor, there are challenges to achieving 7 streams of income. First, there is the risk factor that comes along with it. You have to be willing to take big risks – to step away from the 9 to 5 rat race focus and instead look at other opportunities. It’s hard to take your money and invest it in other areas hoping that it helps increase your wealth.
Your tax situation can get quite complicated too. Not only is there your ordinary income tax, but also capital gains tax, profits, losses on investments and business income, and royalty income to consider. Not knowing what your tax liability will be or how each income stream will affect it can be nerve-wracking.
Finally, letting yourself earn a passive income stream can be hard. If you aren’t used to sitting back and letting your money work for you, it can feel hard or even impossible not to be active and earn an active income. Letting yourself realize that there’s only so much you can do and that you have to let passive income be one of your income streams, or you’ll never reach millionaire status is a hard pill to swallow for some.
Tips to Build Wealth With the 7 Streams of Income
If you’re ready to build wealth with the 7 streams of income, here are the top tips to help you get started.
Pace Yourself at the Beginning
Don’t jump in headfirst and take every opportunity that comes your way. Building wealth requires a methodical strategy with a steady cash flow, an active income stream, and plenty of passive income streams to help you reach your goals.
These income streams won’t happen overnight. You’ll need to figure out what risks you’re willing to take, what you’ll do to earn income, and what assets you’ll rely on to help you increase your wealth.
Build Passive Income
Passive income is the key to increasing your net worth. Let your money work for you, whether it’s completely passive or just somewhat. Put money in things like a high-yield savings account and more aggressive investments that will grow, earn capital gains, and help you reach your goals.
Keep Expenses Low
If expenses are too high, they’ll eat away at your profits. Look for brokers and investments that don’t have high upfront costs, commissions, and other costs that hurt your passive income stream.
Diversify Your Investments
Never put all your eggs in one basket. Your income streams should be so diversified that if one fails, several others thrive. On the other hand, if everything is invested in one industry or one type of asset, you run the risk of losing everything.
Instead, having a diversified portfolio creates multiple income streams that allow you to take advantage of things like the stock market, low-cost index funds, real estate investment trusts, and commodities.
Even consider leveraging your investment and investing in real estate investments. You’ll have additional income streams from rent, equity buildup, and eventually, capital gains when you sell the property, none of which have anything to do with the stock market.
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Start a Side Business
Your 9 to 5 job might provide your main income, but a side business or side hustle can provide the multiple income streams you need to diversify your income. Running a side business is mostly an active income stream, but there may be some aspects that make it passive income too.
Think about what you love to do and how you can turn it into a business that will increase your income and wealth.
Does the Average Millionaire Have 7 Streams of Income?
Most millionaires do have 7 streams of income. They built their wealth while they earned money. Their earned income covers the bills and the cost of living, while all other income streams help increase their wealth and allow them to become financially independent.
Do You Need 7 Streams of Income to Become a Millionaire?
7 streams of income aren’t required to become a millionaire, but the more streams of income you have, the easier it is to reach millionaire status. Multiple streams of income put less stress on each individual stream, allowing you to reach your goals. At a minimum, you’ll need three income streams to fulfill your dreams of becoming a millionaire.
Aim for 7 streams of income to become a millionaire or to reach financial independence. Active and passive income helps you reach your goals and puts less pressure on any one stream of income you have. Think outside the box, take some risks, and enjoy the rewards of having multiple streams of income.
Samantha Hawrylack is a personal finance expert and full-time entrepreneur with a passion for writing and SEO. She holds a Bachelor’s in Finance and Master’s in Business Administration and previously worked for Vanguard, where she held Series 7 and 63 licenses. Her work has been featured in publications like Grow, MSN, CNBC, Ladders, Rocket Mortgage, Quicken Loans, Clever Girl Finance, Credit Donkey, Crediful, Investing Answers, Well Kept Wallet, AllCards, Mama and Money, and Concreit, among others. She writes in personal finance, real estate, credit, entrepreneurship, credit card, student loan, mortgage, personal loan, insurance, debt management, business, productivity, and career niches.