All the opinions presented in this article and any errors herein are my own. This article is for information purposes only. It is not intended to be financial advice. Seek a duly licensed professional for financial advice.
What is the correct method to become a millionaire? Can you accumulate a million dollars by saving money in your bank account? If you earn a fixed income and save a portion of it every month, you would not be able to accumulate a million dollars even after working for it your entire lifetime. Even if it's possible, it would take way too long for you to reach that.
Can you earn a million dollars by working hard on your job? By the time you get promotions and higher wages, a lot of your years would already have been spent and you would be too old by the time you start earning a high salary.
The three types of income
Then what is the correct way to become a millionaire? One of the most important things needed for anyone to achieve financial freedom is a continuous flow of income. A fixed income is not enough to make you rich. Having multiple and continuous flows of income is the best method for financial growth.
Incomes are classified into three different types:
- Active income
- Portfolio income
- Passive income
The earning you receive by working at your job is called active income. An active income won't make you rich. This is because when you work at a job, you are helping your employer get richer. You are not acquiring assets for your own. And it's already a known fact that acquiring more assets increases your net worth.
Portfolio income refers to the money you earn from your investments. A portfolio refers to your collection of financial investments.
Passive income refers to the money you earn without doing any work. For example, if you own a property and allow it to be used commercially in exchange for rent, then the earning you get from your property is called passive income.
Your ability to use your active income to generate a portfolio income and passive income determines how wealthy you become. If you solely depend on active income, you are working for money. If you can generate a good flow of portfolio and passive income, your money works for you to make more money.
Most billionaires never earned their billions by saving money in their bank account. Billionaires are usually owners of highly-valued companies. A fall in the stock price of their companies can also cause a fall in their net worth as well.
Working for others and striving hard to get a good job can help you pay your bills, but it won't make you rich. There are only a few ways that you should aim to do if you want to become rich and rise above the middle-class:
- Provide something of value to society. The founders of Microsoft, Facebook, etc. are billionaires because these companies gave great value to many people around the world.
- If you can't create something that provides value to society, try using the most simple formula for becoming rich: start acquiring assets. Assets can be in the form of investments, property, or anything of value.
- Have multiple sources of income. Try to use your regular active income to obtain portfolio and passive income. When your money works for you to make more money instead of you working for money, that is when you realize that you have truly become rich.