Everybody wants to be a millionaire or even a billionaire, but do you know the efforts involved? One of the factors that contribute to the wealth of millionaires is the building of passive income.

This means that if you will like to be a millionaire like that mentor of yours, you better start looking for ways to build a passive income. Even though it is easy to say, building a passive income might not come yield result immediately, it is a product of long hours of efforts.

So, for you to start building your passive as quickly as possible, this article will provide you with the needed information to get started. First, let us find out what passive income is.

• What is Passive Income?
• What are the Types of Passive Income?
• Can Passive Income Make you Rich?
• What Streams of Income do Millionaires Have?
• How Most Millionaires Make Their Money?
• What are the best ways to become a millionaire?
• What are the Most Profitable Side Hustles?

What is Passive Income?

Passive income is earnings derived from a rental property, limited partnership, or other enterprises in which a person is not actively involved. As with active income, passive income is usually taxable.

Read Also: How to Become a Self-Made Millionaire

There are three main categories of income: active income, passive income, and portfolio income. Passive income has been a relatively loosely used term in recent years. Colloquially, it’s been used to define money being earned regularly with little or no effort on the part of the person receiving it. 

Popular types of passive income include real estate, peer-to-peer lending (P2P), and dividend stocks. Proponents of earning passive income tend to be boosters of a work-from-home and be-your-own-boss professional lifestyle. The type of earnings people usually associate with this are gains on stocks, interest, retirement pay, lottery winnings, online work, and capital gains. 

While these activities fit the popular definition of passive income, they don’t fit the technical definition as outlined by the IRS’s Passive Activity Losses—Real Estate Tax Tips. 

Passive income, when used as a technical term, is defined as either “net rental income” or “income from a business in which the taxpayer does not materially participate,” and in some cases can include self-charged interest. It goes on to say that passive income “does not include salaries, portfolio, or investment income.”

What are the Types of Passive Income?

Self-Charged Interest

When money is loaned to a partnership or an S-corporation acting as a pass-through entity (essentially, a business that is designed to reduce the effects of double taxation) by that entity’s owner, the interest income on that loan to the portfolio income can qualify as passive income.

According to the IRS, “Certain self-charged interest income or deductions may be treated as passive activity gross income or passive activity deductions if the loan proceeds are used in a passive activity.”

Property

Rental properties are defined as passive income with a couple of exceptions. If you’re a real estate professional, any rental income you’re making counts as active income.

If you’re “self-renting,” meaning that you own a space and are renting it out to a corporation or partnership where you conduct business, that does not constitute passive income unless that lease had been signed before 1988, in which case you’ve been grandfathered into having that income being defined as passive.

According to the IRS’s Passive Activity and At-Risk Rules, “It doesn’t matter whether or not the use is under a lease, a service contract, or some other arrangement.”

However, income from leasing land does not qualify as passive income. Despite this, a land owner can benefit from passive income loss rules if the property nets a loss during the tax year. As far as holding land for investment, any earnings would be considered active. 

‘No Material Participation’ in a Business

If you put $500,000 into a candy store with the agreement that the owners would pay you a percentage of earnings, that would be considered passive income as long as you do not participate in the operation of the business in any meaningful way other than placing the investment.

The IRS states, however, that if you did help manage the company with the owners, your income could be seen as active, because you provided “material participation.”

The IRS has standards for material participation that include the following:

• If you’ve dedicated more than 500 hours to a business or activity from which you’re profiting, that is material participation.
• If your participation in an activity has been “substantially all” of the participation for that tax year, that is material participation.
• If you’ve participated up to 100 hours and that is at least as much as any other person involved in the activity, that also is defined as material participation.

Can Passive Income Make you Rich?

Yes. Passive income is how the richest among us still build their wealth. When you don’t have money, you can leverage your time and effort to create income streams that will grow into the future. As you accumulate money, you’ll deploy that cash (and even combine it with your time) to make more and more passive income.

Passive income is the idea that you deploy time and/or money and receive income with no additional work. You have to try to do something to generate some passive income up front, and then use that to generate even more income over time.

Investing is a great example of passive income. You invest money in a company stock, and you receive a dividend payment and appreciation on the investment. Another popular example is real estate.

Whenever you buy some property or a piece of real estate, its rent serves as a source of passive income. Even a general appreciation in the property’s value serves as a kind of passive income.

What Streams of Income do Millionaires Have?

The goal of creating multiple income streams should be to maximize your potential in each category available to you.  If you are just starting out, it really isn’t reasonable to expect you to generate tons of rental income. 

However, if you start maximizing your income generating potential through your primary salary, you will find yourself having excess income that you can reinvest to generate additional income streams and earn more money.

Below, we will outline the 7 streams of income that millionaires have and how you can key into them yourself.

Primary Salary

For most people, their primary salary is their main income stream.  In fact, almost everyone starts this way. The goal is to maximize your primary salary to a point where you are generating enough free cash flow to reinvest in secondary income streams.

How do you do this?  Well, try to get the highest paying job you can!  Ask for a raise!  Utilize services, such as Glassdoor.com, to see how your salary competes with others in your same job.

Some companies really force employees to leave to get a raise and then come back for another raise.   This industry jumping promotional strategy is very common and could work.

Or, there is another theory for your primary salary – generate enough to have a little excess cash flow, but do it at a place that you can work stress-free and have time to dabble in other projects.  A good friend of mine has this setup – he works 10-5 and makes $50,000 a year. 

This allows him to easily cover all of his expenses, but the shorter hours and flexibility in his job allows him to pursue his secondary income generating ideas!

Either way, the great thing about your primary salary is that you can usually get benefits, such as health insurance, that really protect you while you are pursuing your other ideas!

Secondary Salary/Spouse’s Salary

No matter what venture you undertake in life, you need a team.  We believe in teamwork, even if it is just to bounce ideas off of or to have someone tell you that you are off track. For many individuals, this person is their spouse, who also brings some income diversity to the table.

But be careful: if your spouse works at the same company, or in the same industry as you, you are not diversified, and should something happen, you could be in a world of hurt. 

Companies do go out of business, companies do lay employees off. There is nothing wrong with working together, but realize that you are not diversified and you should be trying to maximize other income streams as a result.

Investment

After employment, most individuals gain income diversification through investing. It is important to look at why we invest: because at some point we plan on using this money for something. For most, it is saving for retirement, and the investing is done through vehicles, such as a 401(k) or IRA. 

But investing is not just about stashing money away for a rainy day – that is what an emergency fund is for.  Investing is about having enough capital to generate income.

Investing generates income through dividends, interest, and return of capital.  You really want to maximize the first two, and stay away from the return of capital as much as possible.

Think about it. If you are saving for retirement, you are trying to save enough in investing to generate enough income to replace your primary salary.  Let’s take my friend’s example above $50,000 a year. To generate $50,000, you would need to have almost $1,700,000 saved and be able to generate a 3% cash flow on that money (which is reasonable if invested in dividend-paying stocks).

You could also draw down on your principal if needed, but this is a return of your invested capital, and if you continue this for a long period of time, you run the risk of exhausting your resources.

Rental Property

Purchasing a rental property is another common way that individuals generate an income stream.  It is very similar to investing, in that you take a sum of money to purchase the property, and the property returns a cash flow – rent. 

You do have expenses related to this that are different from investing, such as a mortgage, utilities, property taxes, etc, which all must be taken into consideration when calculating a return on rental property. Rental property does have tax advantages that investing doesn’t have.

The problem with rental property is that initial capital outlay required to get started.  Most people starting to diversify their income streams don’t have a 20% down payment to purchase an income property.  That is why this is usually something that is done later in life, almost like an advance multiple income stream topic.

However, there are ways to do this earlier, such as getting started with real estate crowdfunding. With real estate crowdfunding, you can become a limited owner in real estate for a smaller amount of money. It’s a great way to get started investing in real estate.

We recommend the following: 

You can start investing in real estate for as little as $5,000 at platforms like RealtyMogul. They have different multi-family and commercial properties that you can invest in.

Another similar platform is FundRise. They only have a $500 minimum to get started and offer a variety of options we love as well! FundRise has really been a great performing passive income investment over the last year!

Online Business/Hobby Business

The final most common stream of income is creating a side business.  This business could be online or offline, and we call it a “hobby business” because it usually takes a form that relates to the owner’s hobby.

For example, if you are tech savvy or enjoy working online, you may sell of eBay, or create a website, or promote your services through a site like Fiverr.

If you work offline, you could do Partylite Candles, make-up like Avon, or various clothing and jewelry lines.

The point is that you can diversify your income in various ways. You can basically choose one of each from the categories above, and create a very diversified income portfolio.

The other point is that it is pretty easy to get started. You don’t need to be super rich, and you don’t need a lot of time to get started. To say it requires no time would be a lie, but you don’t need to make anything listed above your life. 

You can work at your job, invest your excess income, save to buy a rental property or rent out a room in your current house, and you start a side job online without breaking a sweat.

How Most Millionaires Make Their Money?

For you to be a millionaire, it will be easy for you to learn for the millionaires. Find out how they made their millions, and see how you can replicate their model. Although mot millionaires will not ready provide this type of information, the internet is there to help you and some millionaire have been generous with this information.

So find four paths that can lead you to your millions.

1. The Saver-Investors path

Just less than 22% of the millionaires in my study chose to take the Saver-Investors path. Not only is it the easiest way to build wealth, but if you start early, it almost always guarantees a lot of money.

The Saver-Investors in my group reached their first $1 million around their mid-to-late 30s, and accumulated an average net worth of $3.3 million by their mid-50s.

They also had four things in common:

1. They typically had a middle-class income (many reached a six-figure salary early in their career, and if they didn’t, they lived very frugally.)
2. They had a low cost of living and preferred to save, rather than spend lavishly.
3. They saved 20% or more of their income.
4. They started investing their savings early in life and continued to do so prudently for many years.

No matter what their day job was, this group made saving and investing part of their routine; they were constantly thinking about smart ways to grow their wealth.

The Savers-Investors path isn’t for everyone. It requires enormous financial discipline and long-term commitment.

2. The Dreamers path

This is perhaps the hardest path to building wealth because it requires the pursuit of a dream, such as starting a business, becoming a successful actor, musician or author.

Approximately 28% of the folks in my study were Dreamers, and they accumulated an average net worth of $7.4 million — far more than any of the other groups — over a period of about 12 years.

All of them told me that pursuing their dreams was one of the most rewarding things they had done in their lives. They loved what they did for a living, and their passion showed up in their bank accounts.

Those who want to take this path, however, must be willing to work long hours and able to handle financial stress. The Dreamers in my study worked more than 61 hours per week before finally achieving their dreams. Weekends and vacations were almost non-existent.

Trying to make ends meet was not easy. At first, getting a steady paycheck was “nearly impossible,” one Dreamer said. It was even harder for those who had families to support. To finance their dreams, some decided to put off buying a home, while others dipped into their retirement savings.

If you’re risk-averse, this path may not be for you.

3. The Company Climbers path

Climbers are individuals who work for a big company and devote all of their energy into climbing the corporate ladder until they land a senior executive position.

This is the second-hardest path to becoming a millionaire, and about 31% of the rich people I studied fell into this group. It took them an average of 22 years to accumulate a net worth of $3.4 million or more. In most cases, their wealth came from either stock compensation or a partnership share of profits.

To be a Climber, you must have strong relationship-building skills. Networking and making lasting connections with powerful people in your industry is essential.

Like Dreamers, however, Climbers also have long work hours.

Profitability is a huge factor in determining a Climber’s success. If their company struggles financially, their time and investment there might not be rewarded to the extent they had expected.

4. The Virtuosos path

Roughly 19% of the participants in my study chose this path. Virtuosos are among the best at what they do in their profession. They are paid a high premium for their knowledge and expertise, which sets them apart from the competition.

It took the Virtuosos in my study about 20 years to reach an average net worth of $4 million. Some worked in the medical field, while others worked in law. A handful either worked for large, publicly-held corporations, or they were small business owners with highly profitable enterprises.

Of course, Virtuosos aren’t necessarily born with natural intelligence. They must spend many years continuously studying and learning. Formal education, such as advanced degrees, is usually a requirement.

This means investing an enormous amount of money and time before seeing any payoff at all. Not everyone has the ability to devote significant hours every day practicing their skill or the financial resources to pursue advanced degrees.

What are the best ways to become a millionaire?

According to a survey by Best Wallet Hacks, the top 10% of U.S. income earners are gaining wealth from business, farm and/or self-employment income. Half of their income comes from wages through business, and the other half comes from interest, dividends and capital gains. Those numbers have not changed much since 1989.

Millionaires suggest several paths to building your wealth and becoming a millionaire. One path to consider is having multiple streams of income. Those who want to earn more money should make sure that all of their income streams continue to grow.

If you want to be a millionaire, you should invest money every day. You should work to make more money so that you can invest more.

Saving is also a great way to become a millionaire. In other words, when you earn money, put it in a savings, retirement or some other investment account. When you get paid, have an automatic deduction go to some type of savings.

The Fidelity study showed that when considering their financial future, 30% of the millionaires surveyed said they were concerned with preserving their wealth, while 20% said they were focused on growing their fortune.

The study found that millionaires’ financial environment outlook continues to improve, with their optimism reaching the highest level since the survey’s inception in 2006.

“One trend has held true throughout the life of this study: The millionaire investor’s outlook has been consistently pragmatic about current market conditions and pervasively optimistic about a future recovery,” said Michael R. Durbin, president of Fidelity Institutional Wealth Services.  “In many ways, what millionaires have been thinking and doing can be a strong indicator for financial trends.”

Once such trend is millionaires’ current interest in the stock market. The millionaires surveyed ranked individual domestic stocks as their top investment added in the past year, followed by certificates of deposit, money market accounts or cash equivalents; equity exchange traded funds; individual domestic bonds; and domestic equity mutual funds.

The study was based on surveys of more than 1,000 millionaire investors. 

What are the Most Profitable Side Hustles?

If you’re looking for ways you can earn a passive income with a side hustle, you’d likely encounter hundreds of strategies for making some money. However, depending on your unique needs and your skills, earning a respectable amount of cash, and doing it quickly, might be well within your reach. 

Some of the strategies listed below offer a quick fix for making some money, others will take a sizable investment of your time. Either way, select a method that fits within your skill set and ensure that you deliver a serious amount of value. At the end of the day, that’s what it’s all about.

1. Sell items on Ebay or Craigslist

One of the surest ways you can make cash if you’re in a bind is to sell items on Ebay or Craigslist. Any used items like furniture, household appliances, collectibles or anything else that you’re just not using or is collecting dust, can be sold online to make some money.

If you’re serious about this, you can even do it professionally for others and collect a small commission for each sale. Take quality photos and write a good description and you’ll be in great shape. 

2. Drive for Uber or Lyft

One of the most widely available ways for making money is to drive for Uber or Lyft. The sharing economy has quite literally exploded, and both Uber and Lyft are at the forefront. The best part? You can turn on and off your availability through these networks with the simple click of a button, effectively allowing you to make money no matter what time of day or night it is.

3. Rent your spare room on Airbnb

AirBnB offers a great resource for people that are willing to rent out a spare room or even their entire home. If you’re in a bind for some fast cash, AirBnB offers you an avenue for creating an income.

You’ll get paid 24 hours after a guest checks in, which is to avoid any problems or potential scams that might arrive. Some people earn their primary income just by renting out rooms or homes on AirBnB.

4. Manage social media for small businesses

Many small businesses need a social media manager and simply don’t have the time nor the expertise to be constantly posting on social media platforms like Facebook, Instagram, Snapchat or Twitter.

Take it upon yourself to contact local businesses and offer up your services for a contracted monthly fee. This is an easy way to make money no matter where you live.

5. Answer questions on JustAnswer

Websites like JustAnswer pay you to answer professional questions. If you have a high-level skill such, as experience in law, medicine or information technology, you could get paid to help others navigate certain topics or areas of contention that they might be faced with in life.

6. Start a blog

Okay, so you won’t make money that fast with a blog. But, if you start a blog and deliver enormous amounts of value, you could set yourself up with a platform for ending a tremendous amount of passive income. This is something you can easily build on the side with just a few hours of work per week, but you need to stay consistent and post great content regularly.

7. Create an online course

Create an online course with a platform like Udemy or Teachable and leverage some of your skills to create a healthy income. Depending upon how much time you invest in your course, you could make a substantial side revenue stream by creating courses that deliver tremendous amounts of value.

8. Do micro-jobs on Mechanical Turk

Amazon’s Mechanical Turk platform is one way you can earn money, though it won’t make you rich by any measure. However, if you’re looking to take on micro-jobs that can be done in a few minutes each, by stringing them together, you could earn some cash that might help you out if you’re in a bind.

9. Tutor over Skype

You can tutor people over Skype, no matter where you might live. This is great, especially if you’re a digital nomad and you’re looking to earn more money than the local job market can potentially provide. Tutor people from the U.S. or U.K. if you’re traveling through Asia or another low-cost-of-living country around the world.

10. Get a part-time job

Okay, so maybe you need some cash and you already have a full-time job and you’re just not comfortable making money online or trying to hustle with some web-based project. You could get a part-time job. You can kiss your social life goodbye, but it’s certainly a more guaranteed additional stream of income.

11. Babysit or become a nanny

If you need to make some quick cash, you could always start babysitting or even become a part-time nanny. You use a variety of sites to do this like Care.com or SitterCity or even post your services on social media sites. You’ll get vetted and rated for your services, so be sure to provide a top-notch experience.

Read Also: 10 Secrets of The Millionaires Next Door

12. Clean houses

Housekeeping is always an option. There are loads of private families and homeowners that are renting out their homes on a short-term basis that needs housekeeping or house cleaning services. You can list your services on a site like HouseKeeper.com and many others to promote yourself.

13. Have a garage sale

You could always hold a garage sale to make some money by getting rid of excess clutter in your house. This is great if you have children that have outgrown toys or you simply have a large number of items that you’re looking to part ways with. Post up some signs around town or advertise on Craigslist.

14. Create YouTube tutorials

Although this isn’t the quickest way you can make money with a side income, creating YouTube tutorials can help you earn a respectable amount of income as long as what you deliver is engaging and keeps people interested for long enough. You could also use free tutorials to upsell viewers on products and services you might be offering.

15. Become an affiliate marketer

Affiliate marketing is an extremely alluring industry. However, many affiliate marketers don’t make much money. If you have the skills it takes to succeed in this arena, you could quite literally make a small fortune. But be careful not to get drawn into pie-in-the-sky hopes or dreams of making money without putting in much effort.

Conclusion

Are you ready to build passive income like the millionaires? With the information in this article, you are now a step closer. Consider all the tips we have mentioned that can help you and put in the needed efforts.