by elmads

Introduction

Time can never be taken away, that’s why it is considered as one of the most important commodity to the human kind. Money actually can help us with that specific dilemma. Don’t get me wrong, it’s true that money can never buy back time, but what it can do is buy us time. What I do I mean by this? Money can give us the comfortability and the time to do what we really want and love to do, which is directly related to our own being.

Invest in your time to explore and learn about things that can buy you more time in the future. In the end of the day, people are meant to move and work as long as we feel the sense of happiness and fulfilment in what we do. That we are a part of an endeavour that gives value to ourselves, our family, community and the world.

That being said, achieving a certain amount of money to buy us time for our own doesn’t come for free. Just like in Robert Kiyosaki’s Poor Dad Rich Dad book have said;

“invest your time when you have no money.”

For this to happen, we must learn and acquire the knowledge, skills and application of making money without us requiring our body to work. Making money even we are at sleep, money working for us 24 hours a day.

In this blog I will be discussing the last 3 income streams that can have regardless if we are employed or have our own business.

I’ve made a blog for the first 4 income streams that requires our own physical effort and time to attain income. here’s the link on that blog, titled “The 7 Streams of Income – Part 1”.

Interest Income

This is the most popular stream of income outside our regular earned income. Interest income is the Interest we receive from our bank savings account. It is us lending our money out to the banks. Most people open savings accounts in banks to have additional income on their saved money, the problem here though is the yield or return they get from their deposited capital.

I’ll be honest here, savings accounts are not a good source of income. Why? because the return on our capital is less than the inflation rate of our country’s currency. This means that the income we receive from it is not sufficient enough to keep up with the decreasing buying power of our money due to inflation.

Nevertheless, this doesn’t mean that we shouldn’t utilize it, because interest income is beneficial for the short-term horizon. The money that we will need within 3 years, like for our personal wants fund, travel fund, and personal growth fund. Also, we could put a portion of our emergency fund and rainy day fund here as well. It’ll be better if we’ll be using a flexible savings account for the said two funds, so that we can still withdraw the money within the day, when needed be.

The priority of interest income is receiving a very small interest in our saved capital, in exchange for the accessibility.

Other examples to achieve interest income is through Certificate of Deposits, Money Market Funds, and Peer-to-Peer Lending.

Dividend Income

This has been one of the popular income streams, a way to attain additional income flow without needing any physical time and effort.

Dividends comes from investing in “Equities”, it us having a piece of ownership of a company. If you don’t have any general idea yet about Equities, Stocks and Dividends, I recommend for you to read my blogs below.

“The 5 Basic Asset Classes”

“How Shares are made and how The Stock Market works”

“Stocks and Shares”

“Popular Investing Strategies”

Moving forward, dividends are money given by the companies that we are invested in. It is the money given to us by the company, as what we own as a shareholder of a company is the piece of earnings that the business generates. To give you context, think of it as the money given to us by our parents when we were young.

Our dad and mom is the company, we the children, are the shareholders.

The portion of our parents’ income is allocated to our education, food and sometimes, money spent for our own enjoyment during our younger dependent days. Basically, that’s how dividends work as well, but not all companies give dividends.

The board of directors of a company are the ones who decide if they will be giving out dividends to their shareholders, or not. For more information regarding dividends, see my blog titled “What are Dividends”.

Unlike interest income, some dividend paying companies give out decent return on investments. Some actually gives higher than the average inflation rate of their currency. Nevertheless, with higher returns garner higher risk, that’s what balances investment returns.

What risk am I pertaining to you asked? it is the risk of the company not having the ability to pay out dividends in a certain year, or its stock market price may go down, or worse, bankruptcy.

This is the risk in investing in direct common stock of a company, but don’t fret because there are safer ways, and that’s through dividend paying mutual funds. Mutual funds are pooled funds in which a certain professional investor will invest money and make the investment decisions in behalf of the people who gave the money to the fund. For more information about this, read my blog titled “What is a Mutual Fund?”.

Dividends are one of the great passive streams of income that a person can have. Making money without doing any physical labour for 24 hours a day, while eating, while sleeping, while talking with our loved ones, and most of all while just chilling out.

Capital Gains

Capital gains are the returns we get from selling an asset that already appreciated in price. For instance, if we bought Apple Inc. stock at $100/share, then it went up at $150/share and sold it. That means, we gained $50 from that transaction, ($150 – $100 = $50). This is called capital gains, as what the name implies, the gains that we get from our initial capital that we have invested previously.

On the flip side, if you sell your asset at a loss, then that’s not called capital gains anymore, instead it’s called as capital loss. What’s the difference between the two other than the former gained money while the latter lost money? The difference is with the tax.

There is nothing free in this world which all of us knows already, because everything gets taxed. And, this also applies with capital gains. The tax we pay for capital appreciation is called capital gains tax, only if we gain from the said transaction, but if we sell at a loss then it won’t get taxed at all.

NOTE: Selling at a loss is also used as a strategy, this is called Tax Loss Harvesting. This is where some retail and institutional investors sell some of their holdings at a loss so that their total tax that needs to be paid will be less, then the cash from the sold transaction will be used to buy other asset investment. They usually do this method a few days, if not weeks, before the tax year ends.

Capital gains tax differs for every country, same as for the income tax rate bracket. See photo below for the UK’s capital gains tax rate which is dependent on the income tax rate bracket of an employed person.

The photograph above depicts the capital gains tax based on the respective income tax bracket in the UK. If you have an income ranging from £12,571 to £50,270 a year, your capital gains tax rate will be 10%.

In the US, capital gains tax doesn’t just rely on the income bracket but it also depends on the length in which you held the asset, the longer you held on the asset, the lower the income tax rate that you’ll be needing to pay. The shorter the holding period, the higher will be the capital gains tax, this can even reach 37% in capital gains tax which is a massive cut in your investment gains. This is where buying-and-holding for a long time has been one of the most strategic ways to mitigate those capital gains tax rates.

Capital gains also applies for all asset types like equities, bonds, real estate, commodities, cryptocurrencies, even alternative assets have capital gains as well, such as painting, collectible cards and items (Pokemon & sports cards), and whatnot.

That being said, there is a legal way to get away from being taxed with capital gains, and this is through Non-Taxable accounts. In the UK we have the ISAs and the SIPPs, in the US they have 401Ks and IRAs, and in the Philippines they have PAGIBIG MP2 and PERA. I have discussed the UK ISAs in my blog titled “UK’s Tax Exempted Individual Savings Account”.

It is important to maximize and prioritize the Non-Taxable accounts before the taxable accounts for our investments, because taxes have a substantial influence in our portfolio returns.

To Sum It Up

It is important for everyone to have these 3 sources of income, three income streams which do not heavily require our time, effort and attention. Money making money, money working for us.

We could be whoever we want to be and do what we love to do, like to be the best doctor, lawyer, engineer, designer, programmer or whatnot, but we must NEVER EVER FORGET TO INVEST AND MAKE OUR OWN MONEY OUR EMPLOYEES. This is one of the best forces in our world, the means to compound our money overtime through consistency and discipline, without us even putting all of our time and effort unto it.

Interest income, Dividend Income and Capital Gains are the threes streams of income that can make our money work for us for 24 hours a day and forever. It is and will always be loyal and faithful to us, provided that we continue to manage and take good care of it.

Knowledge is my Sword and Patience is my Shield,

elmads

This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.