Investing isn’t just for building up a retirement nest egg. It can be a reliable source of supplemental income at any point in your life. But how do you know which assets will make the most out of your money?
Your income can (and generally should) come from various sources. Read on to learn about the top income investment options you should consider adding to your portfolio.
Why Invest for Income?
First, you might be wondering why you should invest for income in the first place. After all, you have a regular salary. Here are some of the reasons investors choose to generate passive income.
It prepares you for the unexpected
Significant life changes, such as being laid off from a job, can have a major impact on your finances, so it pays to have a safety net you can rely on. Passive income ensures you have a stream of money coming in no matter what life throws at you. Even during times of tranquility, your investments can offer the peace of mind that you’re
It can provide more job freedom
For many, an exciting job opportunity quickly turns into a high-stress obligation. With passive income, you can gain the freedom to explore flexible job options, such as remote or even part-time work, and get back to pursuing the things you’re most passionate about.
It can quickly boost your wealth
Whether you’re saving up for a big purchase or hoping to retire early, earning passive income can help you achieve your goals more quickly. For example, while your salary covers necessary living expenses, you can reinvest your passive income or put it right into your savings.
Types of Investments to Consider
DIVIDEND-PAYING STOCKS
Dividend stocks are stocks of companies that pay dividends, a portion of their earnings, to shareholders. One unique advantage of this income strategy is that companies generally raise their dividends when inflation rises, meaning your passive income could potentially increase over time.
Keep in mind: Dividend stocks are generally less volatile than other stocks, such as growth stocks, but they’re not without risk. They’re still vulnerable to company and market changes, and they’re not guaranteed like fixed-income investments.
INDEX FUNDS & EXCHANGE-TRADED FUNDS (ETFs)
Rather than picking the individual stocks you want to buy, you can invest in index funds or ETFs, which hold various dividend stocks. While they function a bit differently, both appeal to more conservative investors that prefer a more hands-off approach to investing — but are still looking for regular dividends.
Keep in mind: Though cheaper than actively managed mutual funds, ETF trading fees can quickly add up if you’re not careful. ETFs or index funds also offer a lower-risk investment approach, which generally offers lower returns.
GOVERNMENT & CORPORATE BONDS
Rather than, for example, borrowing money from a bank, companies or governments will often borrow capital from a lender (you!). You’ll typically receive monthly interest payments, and after your bond matures, you’ll get your initial money back in full.
Keep in mind: Similar to ETFs and index funds, corporate and government bonds are considered a low-risk investment type. This means you’ll typically see smaller returns than you would with higher-risk investments, such as stocks. Additionally, there’s always a chance that a company could default on its loan.
RENTAL PROPERTIES
When done correctly, renting properties can produce significant monthly returns. They generate income without requiring you to sell any assets, and over time, they should increase in value, which means your net worth increases too. What’s more, rents are adjusted for inflation, so you’re less likely to experience diminishing returns.
Keep in mind: Successfully renting out properties can be a challenge without the right knowledge or experience, so this strategy may not be for everyone. Additionally, you’ll need a lot of money upfront for down payments and closing costs.
REAL ESTATE INVESTMENT TRUSTS (REITs)
REITs are another advantageous real estate investment option. Simply put, REITs are companies that have purchased or invested in various income-generating properties. They allow you to earn regular dividends from real estate investments without purchasing and managing a rental property yourself.
Keep in mind: REITs offer high liquidity and a steady cash flow, but they’re more sensitive to market volatility. They also leave little room for portfolio growth. REITs must pay investors 90% of their profits, so only 10% can be reinvested.
Are Income Investments Right for You?
At Ironwood Wealth Management, we’re ready to help you develop a balanced portfolio that generates regular income and long-term growth while staying aligned with your needs and goals. Reach out today to learn more about how income investments fit into your comprehensive financial plan.
