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This one chart illustrates how the 1% actually earn their money, and what you should employ to do the same.
The nonpartisan Urban-Brookings Tax Policy Center did some research on where income comes from for the 1% vs the entire population. Their definition of “expanded cash income” included things like health care benefits, retirement income, tax-exempt interest, and other add-ons to give a fuller picture of true annual income. Here were the results, in a chart created by CNBC:
Here is the major finding: Almost ⅔ of the income for one-percenters come from non-labor sources, almost the opposite of the rest of the population.
For the overall population, 64% of income comes from compensation, which is essentially your paycheck. By contrast one percenters only see 39% of their income come from compensation. The bulk of their income comes from non-labor sources, the biggest of which are business and investment.
The richer you are, you more likely your income will come from owning a business or investing your money well.
This is a key concept at The Money Habit. I’ve talked a lot about how at some point, you need to be ready to switch gears from maximizing your earnings at your job to managing your investments. Eventually, your nest egg will throw off more money than you save in a given year. And one day not far after that, it will throw off more than your entire salary for the year combined. Since investing is a skill set that takes a while to develop, I espouse the 2x Income Rule for determining when you need to start putting real time into learning the ropes.
The benefits of owning a business are a big reason why I talk a lot about side hustles on this blog. The side hustle is a nice, intermediate step towards building an ongoing earning stream that will not require your direct participation in the future. Telling people they need to start a business is scary. Telling them they should dip their feet in the water by putting in a few hours as a freelancer or contractor is more palatable. Yes, if you start boarding dogs or writing a blog or writing some freelance articles, you will be putting in some major hours at first and your compensation will tied pretty tightly to the hours you work. But you can slowly expand, bringing in others to help if the venture is successful. It gives you a path to owning an asset that will throw off cash for you without being tied directly to hours you put in.
This powerful flywheel requires an initial stockpile to begin. For those just starting out or building the beginnings of their nest egg, they should focus on earnings potential and expense reduction to set aside money that can eventually grow for them. I talk about the four major steps – and the order in which they should be tackled – in the Four Step Blueprint to Retirement.
But if you are already several years into your career, now may be the time to start shifting more of your attention to methods of investment or earning more through a side hustle, particularly a blog (it can be up in 10 minutes) or other business that will only increase in value over time with all the effort you put into it.
For the long game, you will eventually be aiming to have passive or semi-passive sources doing the majority of the work for you. The richest in America generate most of their wealth through business ownership and investment, and you can do the same.
Were these results surprising to you? Have you considered a side hustle or spending more time on building your investment acumen and what has been your biggest roadblock?