The average millionaire may have an average of seven income streams. Passive income is the key to accumulating wealth even when you're not on the clock. Here's how it works!
Have you ever heard the statistic that millionaires have an average of seven streams of income?
I tried to find the survey, report, or some official repeating that statistic, but I was unsuccessful. That said, seven sounds about right to me.
More importantly, how do we get those seven income streams? (If you want to jump ahead, here are some great passive income ideas.)
What spurred this blog post was an idea put forth by my friend at ESI Money in which he talks about how the first million is the hardest. ESI shares how his net worth growth has accelerated. The first million took 19 years of work (the clock started when he started working, not at birth!) but the second million took just four years and nine months.
The more money you have, the more money you'll get.
The rich do get richer! Here's the playbook.
Active versus passive income
Let's start by talking about making money—in other words, your income.
There are two types of income—active and passive.
Active income is when you do work and are paid for that work. If you work at McDonald's, you are paid for the hours you work. If you work in an office, you may not clock in and clock out but you are paid based on the work that you do. If you do nothing, you will no longer be paid.
Don't mistake passive income for zero work.
Passive income is when the payment is not directly tied to active work. Interest and dividends are prime examples of passive income. Typical passive income sources are front-loaded with active work, for which you are paid a small amount, while the bulk of the income comes later.
Don't mistake passive income for zero work. It's still working; it's just that your income is not directly tied to the hours worked. Anyone who owns rental properties knows that it's considered passive income but there is quite a bit of work involved. The work is front-heavy, but if you are lucky, you can collect rental checks without incident for many months before having to do work.
For example, my friend Paula shares monthly real estate investment reports. In March 2016, she profited $7,461 on less than six hours of work. In July, she spent three weeks and $13,648 renovating a rental to increase yearly income by $4,740. Rental income is passive but it requires work.
How do you accumulate wealth?
Here's the next key to the puzzle. Accumulating wealth is uncomplicated:
- Sell your time for money
- Spend less than you earn
- Invest your savings so it will grow without your active intervention
That's it. It's a simple input and output problem.
There is just one constraint on the whole system—your time in this world.
You probably only have 2.21 billion heartbeats. At 60 beats per minute, that's a little over 70 years. Each beat matters.
There's another constraint, and here is where wealth inequality rears some of its ugly head, and it's known as Maslow's Hierarchy of Needs.
You need to eat. You need a place to sleep. And both of those, and other needs, require money.
In an ideal world, you could take your time to build a massively successful business. But in the real world, you need a job.
So in an ideal world, you could take your time to build a massively successful business (or maybe a few failures before the massive success). But in the real world, you need a job that will pay you now so you can feed yourself, clothe yourself, and secure a place to sleep.
I call it financial gravity.
You are subject to financial gravity
Think of your net worth as an airplane. You are trying to get it into the sky and soar effortlessly.
On Earth, we are all subject to the same gravitational force. The larger you are, the more force gravity exerts on your body. If you weighed nothing, you would fly away.
The greater the need (monthly expenses), the more thrust (income) you'll need to take off.
Financially, our "net worth airplanes" are all subject to the same financial pull. Where you choose to live, how you choose to live, the products you buy, etc.—they will determine how large and heavy your plane will be to hold all that stuff. The greater the need (monthly expenses), the more thrust (income) you'll need to take off.
Your net worth airplane takes off when your thrust (income) exceeds your gravity (expenses).
Additionally, there will be a transition point when it's less like a plane and more like a rocket. It's when passive thrust plays a greater role than active thrust. Your investments, hopefully, grow to the point where they exert the greatest impact on your net worth and your income and savings (income minus expenses) plays a smaller role.
That transition point can be challenging to navigate but it is also very freeing.
Continue reading about creating passive income on WalletHacks.com.