Rich Habits Podcast - 30: Demystifying the Average Millionaire’s 7 Sources of Income

Episode Date: September 18, 2023

In this episode of the Rich Habits Podcast, Robert Croak and Austin Hankwitz demystify the seven sources of income the average millionaire has in the eyes of the IRS. Not only do we explain to you what these seven sources are, but we also provide solutions the everyday investor can use to begin working toward achieving these income streams. We also hear from Troy Cates, co-creators of the SPYI High-Income ETF. Troy provides us with a great breakdown of the ETF's income-focused objectives as well as defines who exactly the ETF is built for. ---Be sure to check out Public's new ⁠⁠High Yield Cash Account paying 5.1% APY.⁠⁠ This is higher than anything else on the market and is FDIC insured up to $5M. ---Earn 5.1% APY using a Public HYCA, ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠click here!⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Opt-in and share your email, ⁠⁠⁠⁠⁠click here!⁠⁠⁠⁠⁠Learn more about our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠4-module video course!⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Download our FREE Budget Template, ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠click here!⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠To learn more about Robert: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://stan.store/RobertJCroak⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠To learn more about Austin: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://stan.store/austinhankwitz⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Contact: [e-mail] ---Hankwitz Group LLC has an existing business relationship with NEOS Investment Management LLC. The opinions expressed are those of the author, and the author owns several NEOS ETFs.

Hey everyone and welcome back to the Rich Habits podcast, a top five business podcast on Spotify. My name is Austin Hankwitz and I'm joined by my co-host Robert Croke. Robert is a seasoned entrepreneur in his 50s with more than 200 million in company exits under his belt and I'm an entrepreneur in my late 20s with a background in finance and economics. Since quitting my full-time job on corporate finance a few years ago, I've built a seven-figure media business and actively advised some of the most well-known fintech companies around the world. Now, as the show name might suggest, every episode, we talk about rich habits as they relate to business, finance, and mindset. However, we try and bring you two unique perspectives, one from an industry veteran, which is Robert and then the other myself, someone who's still in the process of building wealth and figuring it all out.

Robert, what are we going to be talking about in today's episode? In today's episode of the Rich Habits podcast, we're going to be demystifying the seven sources of income. we've been told the average millionaire has. I'm a big believer that people should build their investment base to 50 to 100k before thinking about diversifying their income streams. With that being said, we're going to break down exactly what each income stream means and how we believe you all can begin working towards achieving them. This episode is going to be the playbook, right? We see all the time, oh, I want to be like a millionaire, so I got to have seven streams of income. It's kind of intimidating. So what we did is we found the seven streams of income as defined by the IRS,

and now we're going to break those down for you exactly what they mean and give you sort of a couple ideas, if it's a platform or a website or whatever, to help you actually go out and achieve it. So Robert, what's our first income stream? Yeah, let's get right into it. Number one is earned income. This one is super simple, so we won't spend too much time on it. However, if you want to give yourself the best chance of becoming a millionaire in your lifetime, you need to have this one dialed with your career, your business, or whatever, so you have that base income. If your household income isn't $75,000 right now, you're below the median American income. So you need to sit down with your spouse and really ask yourselves, what do we want to be doing for work in 10 years

and figure out how to get there? So don't listen to the fake gurus out there that tell you to go all in on some new side hustle idea and quit everything you're doing because you want to make sure your bases are covered and you're moving in the right direction financially and career-wise. I totally agree. And that might mean, you know, thinking about this 10-year career idea, taking some classes, getting certified in something, or buying some sort of course online that's going to teach you a high-value skill for the future. Having that career dialed in and knowing that, okay, I'm making this much this year, I'm going to have this raise, I got these benefits, I've got this consistent income.

That's how you have the steady inflow of cash that allows you to build the base and start attacking the other six different sources of income that we're going to break down here very soon. So our second source of income is dividend income. This one is super common in something I'd imagine everyone listening right now is taking advantage of. But in case you're not familiar, this is actually cash paid to you for being a shareholder of a stock like Apple, Microsoft, or even in video. dividend income is super important for everyone right now to begin prioritizing because Robert said it best. If your money isn't working for you while you sleep, you'll be working to earn it until you die.

Now, as you all know, Robert Nye's favorite way to generate passive dividend income in our portfolios is the SPYI ETF. This is a covered call ETF that aims to track the performance of the S&P 500, allowing us to see both capital appreciation and a 12% annual distribution yield, right? that's that dividend income. So here's a quick interview we actually had with the chief investment officer of NEO's investments to better explain their ETF. Hey, Troy, and thanks again for joining us here on the Rich Habits podcast. We've been talking about your company's ETFs now for several months and think it's only appropriate for our listeners to hear exactly what they entail from a dividend income perspective from the creator himself. So let's jump into it. Troy, I really like the 12% annual distribution yield, your SPYI,

ETF is able to generate. Its yield is higher than most other passive income opportunities out there. So do you mind walking our listeners through how exactly does this strategy work? SPYI, to get to the core of it, we're long the S&P 500 stocks in the full replication, tracking that index. So from an equity standpoint, that's what we're doing.

Where we get the yield and where we source that income from is from the option portfolio. The option portfolio consists of, of a laddered covered call strategy using SPX index options. What we're doing on the laddered cover call portion of the portfolio is selling calls out of the money on a monthly basis. Those calls are anywhere from 1 to 4% out of the money

when we put the new positions on. And the duration is anywhere from six to seven weeks, but we close those a month later. So it's a four week trade, but a duration of about six to seven weeks. And the goal is to bring in enough income to distribute anywhere from 10 to 12% a year. The nice part about the portfolio and the way the option model works, on average since we've launched about a year ago,

we've been writing on anywhere from 75 to 90% of the portfolio. So that gives you a good 10 to 25% of the portfolio on a monthly basis that is not covered by the short calls. It allows the portfolio to appreciate with the market. And you see that in our returns and how the return profile looks for SPYI versus the S&P 500. The goal was not only to provide a high monthly income, but also have some really nice upside participation. And I know you all use the term tax efficient a lot, but what does that exactly mean, right? What are the tax efficiencies? Index options get a specific rule from the IRS called Rule 1256. They're taxed differently than if they were ETF options or single name options. They're taxed 60%

long-term capital gains and 40% short-term capital gains no matter the holding period. So if you have that trade-out from one day or a month, is you still get that 60-40 tax treatment. And over a year, as you start to have income from that option portfolio, you'll see more tax efficiencies with that 60, 40 income tax split. We also look at other ways that we could do to enhance the tax efficiency of the portfolio, whether it's tax loss harvesting or even being able to use some of the return of capital benefits

that you can see in an income generating option portfolio like SPYI. So I'm an investor in SPYI because I love the income, but who exactly is this product for and who might not care for. Let's break that down. The way we look at it is we're an income producing product first and foremost. So this really slides into anybody's income portfolio. But where does SPYI really fit? Obviously with a 12% yield, you're taking a little more equity risk to get that 12% income. So I look at it and our team looks at it as someone who's looking for income, but is still willing to take that equity risk in the marketplace, having more income being produced from the

equity side of the portfolio. And that's where SPYI really fits. It's a portion of your portfolio that can start to not only give you that income, but still give you that upside appreciation with the market. I really appreciate all this added color, Troy. And I believe if people want to learn more, they head over to neosfunds.com. Is that correct? Neosfunds.com, they could reach out through the website. A lot of advisors will reach out through the website and talk to us. And then we could always set up one-on-one meetings that way. Shout out to Troy. What a great interview. Robert, give us our third point. Number three is rents from real estate.

The next source of income we hear millionaires have are rent payments collected from their properties through their portfolios. We talked about this in-depth in our last episode, especially my pro-tip about buying a duplex, triplex, or quadplex before getting married. This is the ultimate pro-tip, because remember, when you get married,

you are looked at as one entity, whereas prior to marriage, you are separate entities and therefore qualify for two FHA loans if you wanted to use it. Right now, it's hard enough to buy a single family home for yourself in this market, let alone having rentals. But if you want a quick list of three different strategies to buy your first rental property, be sure to listen to Episode 16 becoming the first real estate investor in your family.

God, that was such a good episode. That was probably one of my top five favorites. And don't forget, you can also begin collecting monthly rents by investing into real estate investment trust, or reets, as we also commonly call them. And you can do this on fundrise.com or actually with publicly traded reets through Vanguard's Real Estate Trust ETF, VNQ. Number four, and this one is one of my favorites. Royalties from selling the rights to something they've invented. Millionaires love this one, and this one is right up my alley. If you think back to SillyBans, my first big, big breakthrough in products, we had so many royalty.

opportunities with licensing through Justin Bieber, the Kardashians, Hello Kitty, Marvel Comics. So it was just such an amazing time for me because you're making this income over time for something you've already created and you're getting a percentage of those sales by licensing out that trademark

or that brand to other companies to be able to run with it in their sales efforts. So royalties are an incredible opportunity for those that are inventors or writers or who create music. So don't sleep on royalty opportunities if you have a big brand and you can get it out there

and collaborate with others. Now, I've never invented anything. I don't have cool royalties like Robert. So a fun way the everyday investor like myself might be able to own assets that produce royalty income is through a platform called royalty exchange.com. I personally haven't had the chance yet

to go in and actually invest through this platform, but I've heard some pretty good things. They allow anyone, the opportunity to experience the upside from music, movie, and trademark royalties. Many of you actually go out and invest into a cool royalty, like tell us what the music is, tell us what the movie is or the trademark you got in on by sending us a DM on Instagram at Rich Habits podcast. Now, our next point is something that I think also a lot of people are familiar with, and that's number five capital gains from selling appreciated assets.

This one's very straightforward, right? For example, investing $10,000. into Tesla stock during the pandemic and then selling it for $30,000 after the stock has tripled in price. That $20,000 profit is your capital gains. Yeah, what everyone needs to remember here is that you cannot time the market.

I say it every episode and it's all about time in the market, not timing the market. Don't forget as investors. We are given favorable tax considerations like long-term capital gains tax, allowing us to sometimes pay zero percent taxes on our gains depending on how much money we've made that year.

Millionaires love this. But the pro tip here and a lot of people don't talk about this is losses. So many people forget that if you have losses from a business, you can take those losses and carry them forward as well to go against earned income and profits. So make sure you don't sleep on that tip because many times it can help you reduce your taxes in the following tax year. Yeah, you know, our example here, at least mine was, because I'm familiar with it, Robert, is the stocks, right? Those as appreciated assets and capital gains, but so is real estate, right?

You can sell real estate with capital gains. You mentioned businesses and things like that. So there's a lot of ways that this word like capital gains can take different forms. Well, and that's why having the right tax strategies and the understanding of the structures of your businesses and your income streams is so important. And many people feel they can go it alone. And then they wake up someday and they're like, oh, my God, I have this huge tax bill. Or what did I do wrong here? I got sued and they took away my personal home.

That is why these strategies that we produce and we talk about every single week are so important for people to execute on. Because it's not just about making the money. It's about how much you keep and how well you preserve it over time. So, so critical. Well, speaking of businesses, Robert, give us point number six. Point number six for me is great, and this is a difficult one. Profits from businesses that you own. This one is so much harder than people might think,

but once you've built the business, automated the processes, and it's finally cash flowing, this is where diversification and wealth building gets exciting. The reason for this is so many people get this picture painted through social media that it's all rainbows and unicorns, buying businesses, opening businesses, creating brands. And guess what? If you're not willing to go the distance, have the tenacity, and be able to sometimes go a year or two without a paycheck in that business, then you shouldn't even start it. Because it's not all rainbows and unicorns and you need to be able to be willing to work through until it's profitable.

And that's where most millionaires start. There's a lot of misnomer's out there that millionaires start with four, five, or six different revenue streams. It's just not true. Most of them start with one very successful business and diversify from there. Yeah, this is something I'm still working on myself. And hopefully I'll be able to have multiple cash flowing businesses by the time I'm Robert's age. I actually bought a vending machine business about 18 months ago. That's doing pretty cool.

But it's just, you know, it's pretty small in the grand scheme of things. I'm not going to become a millionaire from it. So we'll see how things take shape, Robert. Well, Austin, as long as we're working together and we're partners, you're going to have a lot more than several by the time you're my age. That's for sure. I love it. Okay, what is the last source of income the average millionaire has? The last source of income is interest from high yield savings, T bills, and lending activities.

This one is a favorite of mine. I firmly believe a high yield savings account is a critical component to becoming financially stable. Everyone needs an emergency fund and we all know if your money doesn't have velocity, it's dead money. So this one is critical. Yeah, you know, by parking our sales. savings into either a high-yield savings account or T-bills on public, link in the description below, we're able to earn 5.5% in annual interest on our emergency fund, keeping up with inflation. Now, by having this emergency fund, right, think three to six months of expenses, we won't be forced to take out a 401k loan or go into credit card debt or take out some sort of predatory

personal loan in the case of an emergency. We don't want to do those things. Couldn't agree more, Austin, an emergency fund is so important and an integral part of everyone's financial strategy. So there you have it. The seven streams of income the average millionaire has broken down into easy to understand terminology as well as different solutions for you to begin working towards them yourself. This isn't rocket science. It's behavioral and habitual, which is why we name the podcast Rich Habits. Time for everyone's favorite part of the podcast. the question and answer. However, before we jump into that,

I want to make a quick announcement. We have officially launched a Discord server, right? The Rich Habits Podcast Discord server. We've actually been working hand in hand with the team at Discord to build this into the best community possible. We've got a bunch of different channels, like announcements, as well as general chats

and investment chat, ideas for brainstorming on topics for episodes going forward. We even have forums where people can talk about what they thought. about the episode specifically. I mean, we've built this thing out for the community. It's got questions. We've got the VIPs, the resources, the credit card ideas, the investing ideas, events that we're looking at and going to so we can even meet up with you guys in the future.

I mean, this Discord server is legit. This wasn't built by just myself and Robert. We actually teamed up with Discord, the company, to build this in the best way possible. So there's going to be a link in the description below. If you all want to join that, ask us questions, have real feedback from Robert and I really get to know us a little bit more, join in these audio groups. It can be pretty fun. So if you're into that, go check it out. There's a lot of instructions on how to join, get the roles, all that fun stuff. So with that being said, let's now jump in to question and answer. Our first question comes from Tina C. Tina says, do you have any tips on helping teenagers save and invest? My son is 18 years old. I'll take this one away because I think every

18 year old should open a Roth IRA and begin investing towards their retirement. Showing them the numbers and the fact that they could have the opportunity to retire with millions of dollars at 65 years old and really guide them to the right mindset is so critical here while they're young. And just to add on top of that, right? Of course, we want 90, 95% of that Roth IRA to be invested into these index funds we know and love like VOO, VTIQQ, things like that. But to get them excited, you could also buy a few shares of their favorite companies in that account, right? Like does your 18 year old, like many other 18 year olds, wear Abercrombie and Fitch every day? Well, if that's the case, like show them how to buy stock in Abercrombie and Fitch and get them excited about buying more and more over the future.

Same thing with Apple products. If they love their Apple iPhone or their MacBook, buy stock an Apple. Or maybe it's a logitech because they're a gamer, right? There's tons of different ways to think about this. But getting them excited about owning stock and the companies they love could be a really good way to help them save and invest. I love this point because you know the challenge I issue all the time that if you want to buy Nike stock or Nike products, you have to buy the same amount in stock. And this point really kind of wraps that up and puts a bow on it from a mindset perspective is getting people early on to think like an investor and not a consumer. So I love that question.

Our next question comes from Mike S. Mike says I'm 54 and have fallen behind on my retirement investing. However, my wife and I are both now investing in our 401ks up to the match and maxing out our Roth IRAs. We're throwing every bit of extra money at retirement investing. With that being said, should we diversify our investments into crypto, precious metals, or real estate? Here's my take, right? A lot of the diversification strategies we've mentioned in the past and talk about often are for people who are a bit younger and still have that 20 plus year of investing horizon in front of them.

And to me, it seems like you're nearing your retirement in about, call it, maybe nine, 10, 11 years. So diversification for you might actually mean optimizing for income. Perhaps, you know, consider the SPYI ETF. We just interviewed Troy here about that. But also consider learning more about selling covered calls against stock you already own. For example, this is something I'm personally trying to learn more about. I went out and bought 100 shares of Tesla stock for about $26,000. And I'm now able to generate $1,500 every month in premium income, right? Cash in my brokerage account that I can then withdraw to my checking account and spend by selling covered calls against that $26,000 initial investment. So that could also be something to learn more about.

If you have questions, just shoot us another DM here on Instagram. I'll try and answer them best I can. Yeah, I love this takeaway to Austin. And I think it's a great question, but you do have some catching up to do. And with that means you really need to optimize your strategies. So the only thing I would add to this is I would really look at cryptocurrency, maybe specifically Bitcoin. In my opinion, in many other people's opinion, Bitcoin has a long way to go, especially with all of the adoption right now with BlackRock and Fidelity and all of these other major, major players. So I would look at Bitcoin because in my opinion, I could see Bitcoin going right now from that $28,000 to $30,000 range, all the way up to $150,000 in the coming years.

so I would have a portion there as well. Great take, Robert. Our last question comes from Scott. Scott says you all mentioned a high-yield savings account that you like, but I don't remember the name. Can you share it again? Yes, we really like Wealthfront's high-yield savings account. It pays about 4.8% right now, and it's really easy to set up.

However, if you want to earn 5.5% interest, I would jump over to public.com and use their T-bills product. super easy to set up super easy to buy and the T-bills there's no taxes on your gains both state and local so this is really great and not the case with the high-ield savings account I just want to remind everyone too if you go and buy a T-bills product on like treasury direct dot gov you actually have to hold it for six months before the money like it's it's an actual period of time there where with public there's constant liquidity just like a high-yield savings so don't be scared about some sort of weird holding period or like a lockup period because that's just not the case. Yes, I love treasury bills and we've done really well and enjoy working with public.com

and using the platform. Everyone, thank you all so very much for listening to this week's episode of the Rich Habits podcast where we break down and demystify the seven different sources of income the average millionaire has. If you learn something from this episode or if you want to maybe partner up with a friend to go attack and figure out how to get a source of income, send this to that friend. Share this episode with your family, your friends, your barber, the guy that's checking you out at Publix or Walmart or Target, wherever you shop.

Share it with people. Share the good word of the Rich Habits Podcast and let them know what you're up to. Everyone, thank you all so much. And don't forget to ask us a question at Rich Habits Podcast on Instagram. And please, please, if you take away any value from us and enjoy the podcast, leave us a wonderful five-star review. Thanks, everyone, and have a great start to your week.