We always talk a lot about having multiple income streams. It is one of the best ways to cushion yourself if one revenue stream fumbles, and to build wealth.
I will not put too much pressure on you by asking how many revenue streams you have (but seriously, do you have more than one?). What I will do, though, is you give you pointers of the 7 streams of income, both passive and active.
You don’t need to have all 7 of them, but at least try and have more than one source of income.
Active Vs. Passive Income
Your income source could either be active or passive. Active income is money you make from jobs you do, like employment or running a business. Passive income, on the other hand, is money that’s not directly tied to working. Think of it as income you earn from dividends, rentals, or a business you are not running.
7 Types of Income Streams
1. Employment Income
Employment or earned income is usually your primary source of income. Many of us start here, and, unfortunately, it can be very limiting. This is where some find themselves living from paycheck to paycheck.
If you are lucky to earn income that covers your expenses and have something to spare, the goal should be reinvesting that money in a secondary revenue stream.
2. Business Income
Can you start a business, or do you already have one in place? Business income, also profit income, comes from the extra money you get from selling products or services. For example, you could buy stuff in bulk at a low price and sell them at retail. Whatever you get on top of what you have spent, that’s business income. Apart from products, you can also offer services, like your professional services, at a price.
This is one of the most challenging steps, especially if you are transitioning from employment income. However, if you hope to be an entrepreneur or self-employed, the journey might be worth it.
If possible, start building your small business when you are still in employment. First, it will give you an additional source of revenue to complement your salary. Second, you’ll not start from scratch if anything goes wrong with your employment or you do decide to leave.
Learn more about 6 Profitable hobbies You Can Start Monetizing
3. Rental Income
This is the income you make from renting or leasing real estate. Maybe it is a commercial place or a residential area, like using spare space in your home as Airbnb. Or you could lease that piece of land you are not using to farmers.
4. Dividend Income
It is the income you earn when you buy a company’s shares. As a shareholder, you are entitled to part of the distributed profits by the company. How much you make will depend on how many shares you own.
For instance, if you own 1000 shares in company A, and it pays Ksh. 10.00 per share, your dividend income for the year will be Ksh. 10,000.00. That’s some pretty good money for just investing in a company without having to do the daily management work.
Keep in mind that not every company pays dividends. Also, some companies opt not to pay dividends and, instead, retain all the profits for the business. As you shop around for stocks to buy, ensure you are buying equities from a company with a track of paying dividends if your goal is to start earning dividend income.
Related post: What Is A Stock Index and How Do You Invest in Them?
5. Investment or Interest Income
Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.
– Albert Einstein
Don’t let your extra money, either personal or business, sit idly in a current bank account. Instead, put it in a savings account with a high yield and benefit from the power of compounding interest.
Compound interest is money you earn from an initial investment plus any accumulated interest. Think of it as interest earning interest; if you let your earned interest sit in the account. With it, money grows faster than when the savings or investment uses only simple interest that’s only calculated using the initial amount.
6. Capital Gains
Have assets, like stocks and properties? Then, you can sell them at a higher price than the initial cost, which then earns you a capital gain.
For example, if you bought stocks for company A at Ksh.10 per share and the stock has increased in value to Ksh.15 per share. You can sell your shares and get a profit of Ksh.5 per share.
Be wary of taxes on capital gains, though. Talk to a financial advisor or accountant.
7. Income From Royalties
Are you a creator? Maybe a writer, songwriter, musician, or you can create products that others might benefit from? This is where royalty income in. it is income you make when other individuals or companies use or borrow your content or property.
For example, if you are a writer, it is now easier to self-publish and have a collection of e-books or physical books. Even with a publisher, you will get a share of the profit when someone buys them.
Be Careful of Taxes
Most of the income you earn, be it active or passive, is usually taxable. The key to enjoying your income is paying the taxman. However, you also need to be smart, so you don’t spend more than you should on taxes.
Enrolling the services of an accountant, tax, or financial professional would be a great idea. They can help you strategize on paying minimum tax legally, with options like setting up a retirement account.
While there are many sources of income, most will fall under these 7 categories. Do not put all your eggs in one basket. Aim to have at least two sources of revenue. The more streams you have, the more security you have financially.