How's it going today, guys?
Welcome back to the channel.
Hope you're having a great day so far.
So, what were gonna be talking about in this video today
is this saying that we hear all the time
that the average millionaire has seven different streams
or sources of income,
and what we're going to do is talk
about the seven different types of income out there
and whether or not every single millionaire
has each of these income streams.
So basically, what this saying shows us here is
that the average millionaire out there
is well-diversified in their income streams,
meaning that they are deriving income
from multiple different sources.
Meanwhile, the average poor person or broke person
That comes from the job,
and we all know that job is an acronym
for just over broke.
So, jobs keep you in your comfort zone.
It's just enough money to keep you showing up every day,
but never enough money to really get ahead,
and you're kind of stuck in this trap of life
of having one income source
and ultimately having your boss
or your employer being the master of your life,
controlling whatever it is that you do.
Now, here's where you run into trouble
as the person with one source of income
versus the person with seven
is if the average person loses their sources of income,
they now have no income.
They have no other ways that they're earning money,
and all of a sudden,
they're relying solely on their savings.
Whereas the average millionaire
who has seven different income sources,
if they lose one of their income sources,
they have these other six income sources
to offset that loss,
meaning that they're still going to be earning money
because the truth is,
shit happens at the end of the day.
Maybe this real estate investor,
one of the properties ends up going sour,
they get a bad tenant,
and they don't make any money from that year,
but they have many other properties to offset that loss.
And maybe you're the employee,
and you get laid off from your job.
I guess unemployment could be your second source of income,
but it's gonna be a pretty lousy one.
So, that's the problem that you run into,
and that is why being diversified
in your income streams is so important.
But this actually goes above and beyond a problem
of just not having enough different income streams
in case you lose one.
What this actually goes into here is
that a lot of these income streams are better than others.
Not every income source or stream is created equally,
and unfortunately, where most people are,
which is earned income,
is the highest category in terms of taxes.
You're gonna pay the maximum taxes
on your income in this category.
There are very few deductions.
There are very few tax breaks.
You're taxed at that highest rate possible.
So not only is the average millionaire diversified
in their income streams,
but they're also taking advantage
of countless tax breaks, benefits, tax incentives
that we're going to get into a little bit
as we identify what each of these income streams are
and how they benefit the person
who earns these different income streams.
So, number one on the list is
where pretty much everybody starts.
Everybody starts here.
Most people stay here.
The few people who leave this category
often are the ones who become the millionaires,
but number one is earned income.
This is the income from your job or the activity.
It doesn't necessarily have to be the job that you have.
It could also be the job that you own
in terms of if you own a business that's just a job.
So, if you're like a painter, for example,
I would still classify that as earned income,
but you might argue that maybe
that would count as profit income,
but it's pretty much owning a job versus having a job,
and if you guys aren't clear on that distinction,
you have to check out the book The E Myth,
which I'll go ahead and link up in the description below.
Really good book on that topic.
But earned income is essentially the job you have,
income derived from your activity,
or basically, you're in a situation
where times equals money.
Now, this category sucks for a number of reasons.
Number one, in most cases,
the only way to earn more money is to work more hours
or beg your boss for a raise,
which you know, good luck on that.
Or number two, maybe go get a second job,
but the thing is, you always have
to have more time involved with this
in order to be earning more money.
The other thing that sucks is this is the maximum category
in terms of taxes that you're paying
with very, very few deductions and tax breaks
for basically people at the end of the year.
You're not gonna have many tax breaks there
unless you're above that standard deduction
with your personal write offs,
which most of us are not.
And the problem with this category is
it's just comfortable enough for people to stay there.
It's just enough money to keep you,
like I said, going back to your job.
It puts food on the table,
but it's certainly not a life that a lot of us want
or the ones that we dream for,
and so, it's really these other categories of income
that are ultimately going to get you
what you're looking for.
Number two, we have dividend income,
and this is income derived primarily from the stock market,
but you may also see dividend income
from types of real estate investments.
So, for example, I have an investment with Fundrise,
which is a crowdfunded real estate investing platform,
and I earn dividends from that as well.
So, that's the two areas that I'm earning dividends
is number one, through the stock market
and number two, through some different types
of real estate investments.
But dividend income is essentially money
that you're receiving from an investment.
So, if you invest in a company,
and they're doing well,
and they're turning a profit,
they're going to share a portion
of that profit with the shareholders,
one of them being you,
and in that case, you're going
to receive those dividend checks.
And dividend income has a huge advantage here,
and that is the fact that you can have
your dividends classified as a qualified dividend.
So, qualified dividends,
that's a little bit above and beyond
the scope of this video.
If you guys wanna do more research on that,
you can go ahead and do that,
but basically, if your dividend income falls
into this category of a qualified dividend,
the tax rate on that income is capped at just 20%.
So, the maximum tax rate for earned income is 37%,
and the maximum tax rate for dividend income is just 20%.
So, there's a massive tax advantage here
to earning dividend income
as opposed to just earned income from your job.
And the other thing about earned income is
it doesn't matter if you're the garbage man
or if you're a surgeon,
you're still in that category of earned income.
There's better forms of it than others,
but you're still actively working
for every dollar you're earning
and paying the maximum possible tax rate.
Number three, the third type of income
is called interest income.
It's not very flashy, not very exciting.
Basically, it's when your money is making you money.
You stick your money in the bank,
and, as a result, you earn interest.
Now, most people may not even be familiar
that this is an income source
because it's so insignificant
because the average checking and savings accounts
in the U.S. pay 0.05% interest,
but for me, for example, I use Ally Bank,
it's pretty popular, with a 2.2% rate,
and so that actually is a significant amount
of income at the end of the year
when you have a large amount deposited,
but that is called interest income.
There are no real tax breaks or incentives with that.
It's just earning income from the money that you set aside,
primarily from the bank.
Now, the pros of this income source is that yes,
it's 100% passive just like dividend income.
Banks are FDIC-insured,
meaning that your deposits are insured
in case that bank were to go insolvent.
And then third of all, you have liquidity
or easy access to your money.
So, if you need to withdraw money
for a purchase or emergency or anything like that,
you can literally just go to the bank
and have quick, easy access to your money.
Number four, we have royalty income,
which is another uncommon source of income.
Personally, I don't know anybody earning this.
I don't think most millionaires are making royalty income
unless it's Justin Bieber or some other musical artist
or something like that.
Basically, royalty income is income derived
from someone else using your intellectual property.
Now, this could be something like your artwork.
This could be music, photography,
or it could be some kind of patent
that you're licensing out,
but is essentially something that you have created,
an idea or something that you own,
and you're licensing it out or giving it,
and you're giving other people permission to use that,
and, as a result, you're earning
some kind of small percentage or royalty
on their use of that property or item.
And there aren't really any tax breaks here
for royalty income.
It's relatively uncommon.
It's going to be taxed at your ordinary income tax rate
or whatever you're being taxed on for your earned income.
Number five, we have capital gains.
This is a huge category for the top 1%
or the millionaires out there.
And capital gains is essentially asset appreciation.
It's buying something today
and selling it for a higher price tomorrow,
and there are so many different tax breaks
in this category for people to take advantage of,
and the main two areas where people are capitalizing
on this capital gains is number one,
the stock market, buying stocks
and then selling them for a higher price down the road,
and then number two, real estate.
These are two things that tend
to appreciate in value over time, and it's two things
that have been making people millionaires
for decades, if not centuries.
So, just to give you guys an idea
of some of these tax breaks here,
number one, you have the long term capital gains tax rate,
which is capped at just 20%,
as opposed to the 37% of earned income.
So, the stock market, for example,
if you hold a stock for longer than one year
in terms of when you bought it and when you sold it,
you can recognize that capital gain
as a long term capital gain,
and it's going to be taxed at a significantly lower rate.
Another example of this in terms of real estate
is a tax law called the main home exclusion,
which essentially makes some homeowners exempt
from paying capital gains tax
if you sell your primary residence.
So, if your primary residence
goes up in value while you own it,
and you meet whatever those requirements are,
you may not have to pay any taxes on those capital gains.
And then the final one we have here
in terms of real estate is a popular one
called the 1031 exchange.
Essentially, if you sell a piece of real estate
and then buy a like kind of real estate,
you can roll the capital gains into that property
without paying any taxes
as long as you meet certain requirements.
So, there's all kinds of tax breaks and loopholes
and things you can do
when you're in the category of capital gains,
as well as dividend income
with your long term capital gains,
things you're not going to see
in that earned income category.
Number six, we have my favorite category
where I am, and that is profit income.
That is being a business owner or being an entrepreneur.
There are so many write offs, tax incentives here,
it's unbelievable.
First of all, if you own a home, or you rent,
or you live somewhere, and you're paying for that housing,
and you have a home office,
all of sudden, you can write off
a portion of your living space,
a portion of your heating bill,
a portion of your electrical bill towards your home office.
If you're taking trips to the store,
and you're buying office supplies,
you can write off the mileage.
If you're traveling for work, you can write it off.
Obviously, you guys have to talk to a tax advisor
about these things in terms of write offs,
but what I will tell you is that
this is the category where I have found the most write offs
and the most tax incentives is being a business owner,
being an entrepreneur.
This is the best category to be in in my opinion.
And in terms of tax breaks,
just one example to share with you,
one that I did this year,
it's called the S. corp election.
Obviously I am an LLC, Scribner Media, LLC,
but I have elected to be treated as an S. corp,
meaning that I am the sole employee of my business,
and I'm electing to be treated as a corporation,
and that election alone,
plus a couple of other hoops I had to jump through,
saved me about $20,000 in taxes in 2018.
So, there's all kinds of different loopholes,
incentives, whatever you wanna call them,
that you're going to have access to
when you begin earning profit income as an entrepreneur.
And then number seven, this is another huge category
that millionaires absolutely love,
that is rental income,
income from renting out real estate that you own.
There are so many incentives here.
As a landlord, there are a ton of different write offs.
You can write off any repairs.
You can write off taxes, utilities,
travel, all kinds of different things,
and then on top of that,
there's another huge incentive called depreciation,
which is essentially writing off a portion
of the value of that home as that asset depreciates.
So, between those two things,
there are massive incentives to owning real estate,
and this is a way that people are able
to take their income, their earned income,
and move it into real estate without paying any taxes.
That's why people like Trump pay very little in taxes
because they understand how the system works,
how they can funnel money into real estate,
do things with depreciation on the back end
that nobody understands
and then virtually pay nothing in taxes.
It's by using these systems that are in place
that basically, you know, it's not necessarily fair,
but that's just the way it is.
And those who understand the rules will end up winning
this game here of making money.
But anyways, guys, those are the seven different types
of income that you earn,
and the last thing I wanna mention here is
that not every millionaire is going to be
in every single category here.
You're not gonna find a lot of millionaires
out there earning royalty income,
and maybe somebody's a millionaire
because they're a business owner,
and they don't own real estate.
But what you may also find is that
you may find a millionaire
who has three or four different streams of rental income
because they have multiple different buildings,
or they have a couple different sources of profit income
because they own multiple businesses.
So, you could have multiple businesses earning you money
or multiple properties.
You don't necessarily have to have all
of these different income sources.
And the second thing I wanna mention here is
that millionaires build these things over time.
You don't try to build seven sources of income at once.
You build one at a time,
and then you figure out what the second one is going to be.
You don't build them all at once.
That's going to result in you basically burning out
and likely failing in that attempt.
But anyways, guys, that's gonna wrap up this video.
I hope you enjoyed it.
Thank you so much for watching.
Let me know what you think in the comment section below,
and I will see you in the next video.
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