There’s a commonly cited “fact” that says that the average millionaire has 7 streams of income.
Well, we’ve done the digging and, spoiler alert: we couldn’t find anything that showed this is true.
What we did find, however, is that the average millionaire definitely has multiple streams of income. And doing the same can absolutely help you on your own path to financial freedom.
Not only does this mean that you’ll have both passive and active income sources, meaning you’ll be earning money even when you’re not actually working, but it’s a great way to protect yourself just in case one of those income streams are cut off, like if you lose your job.
This is why we’ll show you just why having different income sources is a great thing to do – as well as how to do it.
The defining 7 streams of income quote
I could go on for ages as to why you should aim to build up to seven streams of income – if not more.
But, as is often the case, Warren Buffet has done the job for me far more efficiently in just a single sentence.
That is, as one of the most successful investors of all time put it:
“If you don’t find a way to make money while you sleep, you will work until you die.”Warren Buffett
If you’re wondering why you’d have multiple streams of income, that basically sums it up: if you ever want to retire, it’s absolutely a necessity. It also helps to protect you if you’re not able to work for some time, whether it’s because you lose your job or personal circumstances mean that it’s not possible for a while.
Now, it’s true that this doesn’t specifically cover having 7 sources of income, as even having more than one is a great start. But as we’ll see, the more streams of income you manage to build up, the better off you’ll be.
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What’s the 7 streams of income book?
I kind of thought that when it comes to the source of the idea that millionaires have an average of 7 streams of income, a book may have been the culprit.
But that doesn’t seem to be the case, although there are definitely plenty of books that push the idea of having more than one income source.
One of the main proponents of this is the book Multiple Streams of Income by Robert Allen. As you can probably guess from the title, he’s a big fan of shifting away from the idea that you should only have one stream of income: your job.
That said, it’s a bit outdated. Instead, for anyone looking for their new 7 streams of income bible, I’d actually recommend more The 4-Hour Workweek by Tim Ferriss.
This book will blow your mind as to the possibilities that are out there, as it sets out for you just how you can absolutely earn a living almost entirely from passive income.
And that’s basically the key to having multiple streams of income. By setting up a variety of passive income sources, you’ll be able to keep having money flowing into your accounts without the time and effort that’s involved in earning income actively.
What are the 7 types of income?
While there may be seven streams of income out there, this doesn’t necessarily mean that you have to rely on all of them. Even taking advantage of two or three income sources will put you well ahead of the general population.
And when it comes to choosing which ones you want to focus on, the list below sets out your options.
1. Earned income
Earned income is the most main income source most people rely upon, as it’s the income you earn from your job.
Generally speaking, this means that getting paid is based on you producing some sort of output, making it the very definition of “active income”.
There’s absolutely nothing wrong with this. After all, it’s also the first source of income that most self-made millionaires would have had.
But it’s also not wise for this to be the only income source you rely upon for the rest of your life. Remember Warren Buffet’s quote above? While some jobs definitely pay well, it’s going to be very difficult for you to retire if you simply live off your earned income, even if you save some of it.
Instead, you should consider your earned income as a way to build up some other sources of income based on the other options on this list below.
Looking for some sources of earned income? Take a look at:
- 41 Best Online Jobs for Stay at Home Moms
- 22 Best Weekend Jobs To Earn Extra Cash
- 43 Amazing Under the Table Jobs that Pay Cash
2. Interest income
Interest income is what you earn when your money is put somewhere where it earns interest. If you’ve ever had a savings account, certificate of deposit or similar, you’ve probably earned interest income.
While this won’t always be the highest earning income stream, it’s definitely a good idea to keep your savings somewhere where interest income is earned. It ensures that at least some income is generated from the funds you’ve accumulated, allowing these to continue to increase in value over time.
And if you’re looking for somewhere to keep your savings, I recommend an account like CIT Bank’s Money Market account. The interest rate is one of the highest out there and the account is completely fee-free.
3. Dividend income
If you own shares in a company, you’re actually considered a part owner of that business. With this, you could be entitled to share in the profits generated by that company, which are paid to you as dividends from time to time.
This includes if you invest in shares through something like a 401(k), where any dividends you’re paid will be reinvested in your account. This is a great way to ensure your investments continue growing in value, as you’ll then earn even more income from these reinvested dividends.
Dividend income is, in my opinion, one of the best forms of income you can have as it’s completely passive. It’s one of the main reasons why if you haven’t started investing, this should be an absolute priority for you.
To start earning dividend income, it can be as simple as opening a 401(k) or other type of retirement account. You could also try your hand at investing in individual stocks if you’d like, with the first step being to open a brokerage account with a company like Webull.
And what about two more free stocks? All you have to do is deposit $100 in your new brokerage account and two bonus stocks will be on their way.
4. Rental income
Rental income is, perhaps unsurprisingly, the money you earn as rent from an asset you own. For most people, this is going to come up if you own a rental property.
It’s no surprise to hear that investment properties that generate rental income are one of the most popular streams of income out there. Not only can they offer a steady stream of income, but there are also all sorts of tax deductions involved.
That said, there are some downsides. You need a lot of money (or a lot of debt) to get started and, as 2008 should have shown us all, property prices don’t always go up. If they drop and you end up owing more than the value of the property, you’re going to be facing a world of trouble.
This is why, if you’re considering buying something that will generate rental income, it’s important to do your own homework. In particular, make sure you’re comfortable with the repayments involved if you’re taking on a mortgage. You should also be fairly sure that you won’t have an urgent need at any point for the money you’ve invested in your property, as it can take some time to sell this and free up this cash.
5. Profit income
Profit income is what you earn when you sell products or services. Sometimes also known as “business income”, this is likely to be the type of money you’ll make if you start your own business.
This means that it can end up being one of the most profitable types of income. As you build up your business, whether it’s by hiring staff to manage aspects of it for you or through automating segments of your business so these items sell themselves, you’ll be able to earn more and more money.
It’s this point that sets this apart from earned income. You can essentially only increase your earned income when you change jobs, whether it’s through a promotion or switching to a new company. But your profit income can grow exponentially as your business grows, meaning it has the potential to make you very, very wealthy.
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6. Capital gains income
When you sell an asset, like a stock or a house, the difference between what you bought it for and what you sold it for is known as the capital gain.
This can clearly make you a ton of money over time – in fact, it’s why a lot of people trade stocks: with the intention of the stock going up in price, at which point they’ll sell it and profit. The same goes for people who flip houses.
At the same time, you’ll generally have to pay tax on this, with the exact specifics of this varying depending on where you are. This is why it’s important to talk to a tax advisor about your capital gains tax obligations before you go ahead with making money in this way.
7. Royalty income
Royalties are what you earn when you create something unique and you’re then paid by people or businesses to use it. For example, every time a radio station plays a song, royalties are paid to the artist.
You don’t have to be a major musician to earn royalty income though. For example, these companies that pay for ideas can agree to pay you royalties as part of an arrangement where you sell them an idea for a product.
(This can also be the solution if you have an invention idea but no money to develop it yourself.)
Some people only earn a small amount each year from royalty income but others earn millions. While that’s not necessarily the norm, it at least shows that it’s possible.
How many streams of income does the average millionaire have?
The commonly cited statistic is that the average millionaire has seven streams of income.
That said, as mentioned, finding the data that backs this up is next to impossible.
At the same time, it’s safe to say that the vast majority – if not all – millionaires have more than one income stream.
I mean, just look at yourself. If you earn money from your job, have a 401(k) and keep your savings in a high-interest savings account, you’re already at three income streams! So if that’s the case for you, imagine what the very wealthy are doing to earn – and maintain – this wealth.
And while it may be tough to find proof of millionaires having exactly 7 streams of income, there was some data that could indicate that this is true…
What are the most popular income streams of millionaires?
Based on data issued by the IRS, we can see the most popular income streams for a certain portion of millionaires. That is, the list of the most commonly held assets are:
- Publicly traded stock – includes individual shares and mutual funds
- Other real estate – includes commercial property, REITs and “residential property other than the personal residence”
- Cash assets – not only is this actual cash, but also bank accounts, certificates of deposit and money market accounts
- Closely held stock – this is stock in companies that isn’t publicly traded
- Retirement assets – IRAs and 401(k) accounts fall into this category
- Personal residence – where the person lives
- Real estate partnerships – these are partnerships where the main function is the ownership of real estate
- Other limited partnerships
- Other non-corporate business assets – this is where the person is either a sole proprietor or a partner in a business partnership
This data is taken from the IRS’ estate tax statistics, meaning it shows the assets held by people who died in 2018 whose estate when they died was worth at least $5.49 million.
(There are some exceptions, with people who died in earlier years and who may have been worth slightly less, but that’s very few in the data set.)
So what does this show us? Well, it gives a pretty good indication of how people at that level of wealth split their assets. While it’s true that not all of these are streams of income (such as your personal residence), many of them are.
In particular, it shows how investing in shares and real estate seem to be the most popular way for millionaires to allocate their money. This should be no surprise, given how these are pretty widely accepted as the most popular – and often most successful – forms of investing.
While this may not show us whether or not millionaires have 7 streams of income on average, it does show us just how common it is for them to have multiple streams of income – and should give a pretty good hint that you should aim to do the same.
How do I start multiple streams of income?
There are a ton of different ways to start multiple streams of income. A great starting point is to take a look at the list above of the 7 streams of income ideas, which you can then use as inspiration for where to put your own money so that it can start earning you even more income.
Based on that list, some simple second income opportunities include:
- Open a high-interest savings account. I always recommend the CIT Bank Money Market account as it’s high interest, fee-free and completely secure for your money
- Start investing. This could be as simple as opening a retirement account and contributing to this through your employer, but you can also look into my personal investment choice, index funds. For anyone just starting out in their learning about this, I really recommend that you read The Simple Path to Wealth – it genuinely changed my entire investing mindset.
- Start a side hustle. You can sell all sorts of products or services on the side of your “main job” to give you an extra income stream. There are some great part time online jobs out there that can make you serious money – just take a look at these people who make $10,000 a month from their side hustles.
- Write an ebook. Interested in earning royalties but you’re not the next Taylor Swift? Writing an ebook can be an easy way to try your hand at making money from royalty income as once you’ve written it, you can have your book published in a matter of minutes through Amazon’s Kindle Direct Publishing. From there, you’ll have access to Amazon’s millions of customers who, when they buy your book, can earn you royalties.
- Invest in real estate. This doesn’t necessarily mean buying your own investment property, as an alternative can be to invest in real estate investment trusts, or REITs. These trusts are companies that own and operate income-generating real estate on your behalf. By buying stocks in these companies, it’s the same as if you were to invest in the real estate they own, making this a great investment that pays monthly income without the huge financial commitment of owning your own property.
How can I make $1000 a month passive income?
Figuring out how you can make an extra $1000 a month is a great goal to have when you’re looking to build multiple streams of income. This is partly because it’s not actually that hard to do, making it a really achievable objective that you could then build even further going forward.
To find out more, take a look at this article on how to make $1,000 fast.
How many income streams are there?
There are two different types of income streams: active income and passive income.
While these can be broken down much further, including into 8 streams of income or even 9 streams of income, all of these can, overall, be categorized as either active or passive.
The goal then, overall, is to generate as much passive income as possible. After all, active income requires you to, well, earn it actively. This means your earnings are limited as to how many hours there are in a day.
But passive income can be earned even when you’re not actively working on it. This is the entire premise behind The 4-Hour Workweek: you should only have to work four hours to earn enough money to sustain yourself.
Of course, passive income takes some work to get it to the point where it’s producing enough money to do this. Just think of your own investments – you start with investing, say, $1,000 which in itself isn’t going to earn you that much money.
But as you continue to add to this (combined with the magic of compound interest), you’ll eventually find yourself earning significant money from these investments – with barely any ongoing work on your part.
How much passive income is enough?
The amount of passive income that’s enough for you will depend on what you intend to do with this money and how much active income you’re earning at the same time.
That is, if you intend to live solely off your passive income sources, you’ll need enough passive income to pay for all your expenses.
But if you want to, say, invest a certain amount each month and you intend for your passive income to cover this while you continue to pay your expenses with the active income you earn from your job, you’ll probably need less passive income, depending on how much you’re looking to invest.
As you can see, the answer is going to vary depending on your personal circumstances, so do the math and set up your plan from there.
Final thoughts on having 7 streams of income
Whether you’re earning the average income of a millionaire or just a very average income, it’s more than possible for you to have multiple streams of income. Even if you’re not quite at the 7 streams of income mark, even building up two or three is entirely feasible.
In fact, not only is it possible, but I’d argue that it’s imperative for anyone who’s looking to build their wealth. Having a mix of active and passive income streams ensures that you’re still earning money even when you’re not actively working. It’s also a great way to protect your finances, by making sure that even if something happens to one income stream, your expenses will still be covered by the others.
This isn’t just something for millionaires to take advantage of: anyone can build up multiple streams of income over time. And by doing so, you’ll be going even further to secure your financial future.
About the author
Anna is the founder of LogicalDollar and a personal finance expert, having been featured on Forbes, HuffPost, Reader’s Digest, MSN Money, Yahoo! Finance, CreditCards.com and many more. She’s committed to helping others get on the path to financial freedom using the experience gained from turning $60,000 in debt into a six-figure investment portfolio. Find out more.