Everyone is searching for enough cashflow to fund their lifestyle. So what are the fundamental sources of cashflow?
- Universal Basic Income (UBI)
- Wages and Salary
- Royalties and Licensing
- Commissions
- Rent
- Interest
- Dividends or distributions
- Capital Gains
- Grants
- Inheritance, Gifts, Lottery and Winnings
Universal Basic Income (UBI)
Universal basic income. Income support. “the dole”. Unemployment benefits. Call it what you will but it is money given to you by the government for being unable to find or hold a job. Depending on what country you live in the government will just give you money for sitting on your arse to watch TV. Now granted, the money they give you is not enough for a very good lifesytle but it can support a lifestyle, and some people choose that path. Generally government programs are structured this way to incentivise people to go back to work to earn more money so they can have a “better lifestyle”.
Wages and Salary
The exchange of money for time. Most readers should be familiar with this source of cashflow. It is the one most of us have the most familiarity with. Study hard and get a good job.
Royalties and Licensing
Money received from the sale of your copyright or intellectual property usually by an agent. Book authors, artists, musicians, application developers and so on create cashflow from the royalties paid to them from agents for the sale of their artworks. Royalties and licensing can be applied to many types of copyrighted works and intellectual property. Deals can be a percentage % of sales, or a flat rate per sale.
Here are some examples of cashflow from royalties and licensing
- Singer / Songwriter — A music company like EMI records licenses the rights to sell an artists music and then will pay the artist a % of all sales made by EMI of their songs and records.
- Writer — Getting paid by Medium for articles that you publish is a form of royalties, or getting paid by a publisher for sales of your book.
- Youtuber — Getting paid by Youtube for views of your content.
- Designer — getting paid by the user of your trademark or design
- Botanist — getting paid by horticultural companies for the sales of your registered breed of plant.
Commission
Commission is money paid on the sale of products and services.
For example, real estate agents receive a commission for the sale of a property. You could argue that commission is a form of wage and salary, however commission is not directly tied to the hours you work. Commission is based on success and how much you earn is effectively unlimited based on how much you can sell.
Exchanges such as etoro also make their money from commission, but it is called “the spread”. If you have ever wondered why the buy and sell price are different it is because etoro is making their cut in the middle as the agent that brokers the sale between the party buying and the party selling. Whenever you see the gap between buy and sell, just think commission or fees for the platform. Next time you look at “the spread” on etoro for bitcoin have a think about how much money they are making from the volume of transactions.
Rent
Rent is money paid by someone using an asset to the person that owns the asset. We normally experience this when we rent an apartment or condo to live in. We pay rent to the landlord. Our rent is the landlord’s cashflow.
Rent can be made by renting out all sorts of assets including property, cars, boats, machinery, the list goes on.
Interest
Interest is a form of rent. It is money paid to you by a bank in exchange for you letting them use your money. Interest is normally paid as a % of the money deposited.
Interest is currently at an all time low. So it is very difficult to earn cashflow from interest on savings in a bank account.
Dividends or Distributions
Distributions from a trust. That is where the old term “trust fund baby” comes from. A person who gets their cashflow from a family trust or endowment left by their forefathers. This is actually where most “rich people” get their money, this is what is called “old family money”.
Dividends are distributions of profit or capital from a business that you start or have equity in. Dividends are only paid from the profits or retained profits (capital) of the business. This is one of the reasons stocks are so expensive right now on a price to earnings basis. People who no longer work, can’t rely on interest from a savings account and as a result are “chasing” dividends in the stock market. This results in high yield stocks becoming more expensive and their yield falling.
All sorts of business fit here. Primary production. Minining. Product business. Service business and so on.
Capital Gains
Capital gains is money made from the sale of an asset that has gone up in value from when you purchased it. Capital loss is money you loose from the sale of an asset that has gone down in value.
Day traders or Algorithmic traders make or loose their money through capital gains/losses. They buy stock then hope it will go up so they can sell it and make a capital gain.
There are many other examples of ways to make money through capital gains and we will explore that in another article.
Grants
This is money given to you by a government or institution to produce a certain outcome or maybe do some research. It is really a form of wages and salary, but not tied to the hours that you put in. So in this model your hourly rate could end up being very low if it takes you a long time to perform the research or activities supported by the grant.
Inheritance, Gifts, Lottery and Winnings
This is the most unstable form of earnings, but covers money received from unexpected sources like lottery, winnings or inheritance from a great aunt that died. Given it is unstable and unpredictable, I would not call it a stable form of cashflow but I have included here for completeness. It is a source for how money can come into your life.
Source of cashflow
So lets look at where these types of cashflow come from.
- Government -> UBI
- Your Effort -> Wages and Salaries
- Your Effort -> Commission
- Your Effort -> Copyright or Intellectual Property -> Royalty
- Asset -> Rent
- Savings -> interest
- Business or Trust -> Dividends or Distributions
- Sale of Asset -> Capital Gain
- Government or Institution -> Grant
- Benefactor -> Gift or Inheritence
- Gaming Company -> Winnings
