Microsoft, one of the largest tech companies in the world has created 3 billionaires but
it also has created over 12K millionaires, that’s a big number. In fact, now we have
more millionaires than ever had, largely due to the rise of the internet and globalization.
But making money, or keeping your money isn’t easy because the world is changing so fast
that if you aren’t smart enough, you might lose your wealth in a blink of an eye, that’s
why an average millionaire has 7 streams of income.
You don’t want to put all of your eggs in one basket if something goes wrong! You are
doomed. So, Let's find out the different streams of
income,
Ordinary Income The most usual type of income which is also
known as ordinary income. It includes wages, salaries, bonuses, and commissions.
Its when you are directly trading your time for money. Of course, it has its own limitations
since your time is always limited but that’s not the only problem with this type of income.
In 2018, the government (US) collected 3.3 trillion dollars in taxes. and more than half
(51%) of that came from income taxes. In comparison, the corporate income tax only made 8 percent
of the government's revenue. Which means people with this type of income
pay most of the taxes.
Another 35 percent of revenue comes from payroll taxes, which suppose to be split between you
and your employer to fund social security, medicare and so on. But research has shown
that employers pass their portion of the cost to workers.
So, People with earned income pay 86 percent of all the taxes while billionaires pay almost
nothing.
In one way its the easiest form of income because you don’t have to do a lot of thinking
or take any risk, with some set of skills, you can find a job, that’s why it's highly
taxed. But it's not sustainable at all since if you lose this job, you lose your only source
of income.
But don’t worry, in this video you will learn what type of income millionaires or
billionaires have to make so much money while avoiding taxes completely.
2. Secondly, Capital Gains
Capital Gains is when you buy an asset such as a stock or property and then sell it for
a higher price. That profit margin is your capital gain.
Let's say you buy 100 stocks for 100 dollars each, or 10 000 dollars in total, the stock
price rises to 120 dollars, and you decide to cash-out (12K).
So your capital gain is 2K Dollars.
The tax rate is typically around 15 to 20 percent at best on capital gains on long term
investment and 37 in the short term. And if you pay attention it's really popular among
the millionaires not because the tax rate is just 20 percent but if you are smart about
it, you can literally pay 0 tax on it.
The first way one is super easy. Just don’t sell, keep holding your investment, even if
you make billions of dollars, you don’t have to pay a dime. But that might not work
for everyone, you might have to sell some of your investment to have cash on your hands.
that’s why there is a second way!
Tax-loss harvesting! Its when you sell an investment at all a loss
to reduce your tax bill. At first glance it doesn’t make sense, why would you purposely
lose money. Let me explain.
Let's say you are a professional investor and you have multiple stocks in your portfolio.
Your stock “A” increased by 300 thousand dollars which is great.
But unfortunately, your stock “B” decreased by 25 percent, your 200 thousand dollars investment
now worth only a 150 thousand dollars.
and let's say you want to sell 50 thousand dollars of your stock A to have some cash.
Ideally, you should be paying a 15 percent capital gain tax (7.5K dollars).
But there is another way, sell your stock B first for 150K dollars and buy a similar
investment for the same amount ($150K) to realize your loss.
since you have a 50 thousand dollars of realized loss, you can deduct it from your tax bill.
So if you are selling 50 thousand dollars of your stock A, you can deduct the $50K loss.
Boom, your tax bill is zero! ( $50K (capital gain from stock A) - $50K (realized loss from
selling stock B) x 15% ( capital gain tax) = $0)
It's much more complicated than this, and I have oversimplified it and ignored a lot
of details but that’s the idea behind it! usually, it's not done manually but rather
through a computer with a specific algorithm that makes it much easier.
Investors continuously sell their bad investments and reinvest the money back into a similar
asset to realizes losses because you can keep carrying them forward for the rest of your
life. SO when you make a capital gain, you either dramatically lower your taxes bill
or pay nothing at all.
3. dividend income
but that’s not the only income you get from purchasing stock. owning a stock is like owning
a piece of a company, even if that means owning such a small percentage that it won’t make
any difference. And its understandable because companies nowadays grow to trillions of dollars.
And as one of the owners, the company has to share with you its profits as a form of
a dividend.
However, companies usually don’t pay dividends even if they make billions of dollars such
as Google, Boeing or facebook, because they keep the profits within the company to reinvest
it back. That's why most investors are concerned about the stock price and not the dividend.
But companies like Apple do pay dividends. As of November 2018, Apple paid shareholders
a dividend of 73 cents per share. That's not much, but something is better than nothing.
Dividend income is taxed base on your income tax bracket, most people would fall between
12 to 24 percent. However there is still a way to avoid those
taxes as well, but we will keep that for
another video.
4. next, Rental Income
rental income is probably everyone’s favorite. You buy a property and then rent it out!
It's mostly passive where you don’t have to be actively involved. However, from my
experience, its much more time consuming than most people think.
Tenants come and go, some stay for a few months, others for a few years. Some take care of
your property others don’t give a damn. Some pay on time and won’t get you a single
problem, others are just unnecessary headaches, so it has its pros and cons.
However, there is also the commercial property that you rent out to businesses which in some
cases is a better idea. Theoretically you rent almost anything starting
from your car to your phone. However real estate is the most common one.
5. Fifthly, Royalty Income
In 1997, a guy named Jeff Bezos filed a patent, a method for ordering items online. Instead
of first adding your item to your shopping cart and then clicking BUY (on amazon), You
could simply click buy. it sounds so simple that no one should have
patented that, but for the last 2 decades, Amazon made billions of dollars licensing
this patent to companies such as Apple. That's why corporations file for a lot of
patents, even if they don’t need them because they could be a potential source of income.
This is the real passive income. You keep getting paid after your work is done, but
that also includes, writing a book, shooting a movie.
This form of income is usually popular among the artist, Musicians for example usually
make money by letting other people use or sell their music.
6. Interest Income
It's one of the easiest and simplest ways to generate income. it's more of a passive
income where you not actively involved in it. that’s why the rate of return is typically
much lower than other forms of investments. Its when you lend money to government, banks
or corporations in a form of bonds. The bank usually takes your money and lent
to someone else at a higher interest rate! it keeps collecting the payment from the borrower
then pays you back your portion of the deal and pockets the rest! that’s how banks make
money in short!
The government usually raises money in the form of issuing bonds! so when you are buying
a bond, you are lending money directly to the government!
7. And finally, business income
it's exactly what it means, the income you earn as a result of doing business. either
by selling something or providing some kind of service.
And this is probably the most important one among them all of these types of income because,
with other forms of income, you can expect 5, 10 maybe 15 percent rate of return and
the job is to minimize taxes but that only works when you already have some wealth, but
with this form of income (business come) you can have a thousand percent return, just
with a hundred bucks especially since we have this thing called the internet.
Of course, having multiple sources of income is great, if one of them fails, you still
have many others running, however, its also a big distraction. Manging one source of income
is a full-time job, what do you think happens when you have multiple of them.
So do not jump from one income to another. Put all of your efforts into mastering one
them first and once you reach a level when you are earning enough to create another source
of income with minimum effort, then move on! and if you give it a closer look, that’s
how people get rich in the first place!
Just a little disclaimer, most of these things were oversimplified to make the video as short
as possible but I believe it's important to understand the different types of income,
this is why the rich get richer while paying minimum taxes while the middle class pays
a 40 percent tax rate.
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