The first thing the middle class needs to understand about millionaires is that their millionaire status is measured by their net worth, not their annual income, and most of them pay their bills through cash assets, not by paycheck.
The majority of millionaires have multiple sources of income and are diversified in their assets and cash flow. The value of assets that earn them money is where their net worth is usually kept. Few have a million dollars in cash in a bank account because inflation would slowly devalue its purchasing power over time.
Does the average millionaire have 7 streams of income?
Yes, according to IRS reports, the average millionaire has 7 streams of income. In 2015, the IRS released a study titled Over the Top: How Tax Returns Show the Very Rich Are Different Than You and Me the study found that most millionaires have seven streams of income.
What are the 7 sources of income for millionaires?
Capital gains on investments
Owning things that go up in value is a source of income when some of the investments are sold for a profit. This mainly concerns equities and real estate. Stocks are much more liquid and easier to exit than real estate, but owning homes and property can give an investor enormous leverage. Whether capital gains are accrued over years or an asset is sold to lock in profits, it is a source of income for a millionaire upon exit.
Business cash flow
The millionaires who reach seven-figure net worth the fastest tend to be those who start their own successful businesses. The leverage of meeting customer and employee needs by owning a business can create both high cash flow and also a valuable asset that can be sold later for a huge profit. It’s not easy and requires many skills including marketing, human relations, accounting, tax, legal, regulatory, and market research, but can be one of the most financially rewarding endeavours. .
Some millionaires receive income from rental properties. Owning high occupancy rental properties in popular areas can be very lucrative and you can also hire companies to manage and clean them. Airbnb has made this very easy to implement with its business model and app over the past few years.
Additionally, Turo recently allowed people to operate a car rental business. Their model is essentially like an Airbnb for cars and can create significant cash flow for car owners as well.
Royalties and Licenses Intellectual Property
Some millionaires have made their fortunes from best-selling books, patents, or other types of intellectual property. This type of income can be very stable with royalties consistently paid monthly, quarterly or annually depending on the payment structure. It can be one of the best sources of cash because all the work is done up front and the paycheck can last for years or even decades.
Earned income (paycheque)
There are millionaires who continue to work a job they love. These are typically people who have most of their net worth tied to their stock portfolio and personal residence and don’t want to tap into either for monthly expenses yet to keep their jobs.
It can also be high-income executives who are passionate about their careers and have no other effort to retire. Millionaires have the flexibility and financial freedom to decide whether to continue working or quitting, so their job is a choice.
Stock dividend income
Income investors like to receive dividends on their stocks. It compensates investors for owning the shares by sharing the profits of the company with the shareholders. Warren Buffett is not a fan of his company Berkshire Hathaway paying out dividends because they are taxed twice for the company and the investor.
Companies pay taxes on their profits and then pay shareholders dividends from their after-tax profits. Individual investors who receive dividends from a stock must then pay taxes on that income on their own personal income taxes. Since dividends are subject to double taxation, many companies do not pay dividends and instead reinvest all their profits in the growth of the company to give the stock a higher valuation.
Buffett prefers to pay no dividends to Berkshire Hathaway shareholders and instead reinvest his profits back into the company and also receive billions in dividends from the Berkshire stock investment portfolio he owns.
The best way for millionaires to optimize their dividend payments for income tax is to keep their stocks in an IRA account. A Roth IRA makes sense when potential millionaires are just starting out at a lower tax bracket, while a traditional tax-deferred IRA makes more sense for high-income millionaires.
Interest income on bonds and certificates of deposit (CDs) was an important source of income for many people before central banks around the world adopted very low rates, even negative rates in some European countries . With the recent hike in interest rates to fight inflation, bonds could finally be more of a source of income for millionaires looking for a place to park their money.
Interest income is starting to look more attractive for US bonds, at least because when bond prices go down, their yield goes up. There could be good opportunities for great bond yields at some point over the next year. It could help one of the millionaires’ income streams with attractive new prices and yields.
Where do millionaires keep their money?
Most of the millionaires’ money is kept in assets such as the businesses they own, their stock portfolios, and real estate. They usually hold valuable assets that generate cash flow and do not hold a large amount of cash in the bank. They want their money to be made up of things that increase in value, not depreciated consumer goods like cars, boats, and motorcycles.
Many millionaires build their wealth in their area of expertise and then branch out into other investments and cash assets to diversify and stay financially secure. Wealth is built through concentration, but wealth is maintained through diversification.
Millionaires focus on owning things that pay them. They like assets with a high probability of increasing in value over time and also those that generate cash flow so they get paid for the property. This is what mainly separates millionaires from the middle class, ownership of assets instead of going into debt for things that lose value. Millionaires tend to build, buy or create valuable assets, that’s where their wealth comes from.