Most people understand that investing is one of the best ways to accumulate wealth and protect your money. But there are many different approaches to investing, all of which are viable, suited to different goals. For example, if you're interested in growth, you can choose an aggressive strategy with high risks and high rewards. If you just want to preserve your money, you can focus on something less risky and more stable.
You can also optimize your investment portfolio for income generation. In other words, you'll be investing in assets that consistently produce revenue that you can use for whatever you want. But why is this strategy valuable and how do you accomplish it?
Why Is Income Generation Valuable?
There are many motivations that could drive you to invest for income generation. Most commonly, income generation investment is used by retirees and future retirees to practically guarantee a steady stream of income. In retirement, you'll need a reliable way to cover all your expenses, and if you optimize your investment portfolio correctly, you can do it. As an example, if you have $2 million in income generating assets, you could conceivably generate $100,000 per year in income (assuming an interest rate of 5 percent).
Some people optimize their portfolios for income generation as a way to accumulate wealth faster; with this intention, it's most common for people to use the extra income generated by their investments to reinvest and build their wealth further.
Other people like investing for income generation because it's more stable and predictable than other investing methods. Rather than relying on company performance, market dynamics, or other variables beyond your control, you can focus on assets that perform consistently.
The Best Ways to Invest for Income Generation
What are the best assets to invest in for income generation?
- Rental properties. One of your best options is rental property management. If you own a property that's attractive to prospective tenants, you can fill that property and start generating rental income. Ideally, you'll make more in rental income than you pay in ongoing costs, providing you with a steady stream of revenue. There are several things you'll need to keep in mind with this strategy, as not all rental properties are guaranteed to be profitable. And if you want to avoid some of the stress and headaches associated with being a landlord, you'll need to look into hiring a property manager.
- Dividend stocks. Another excellent option is investing in stocks that reliably pay dividends. Some companies have paid quarterly dividends at consistent intervals for decades; while there's no guarantee they'll continue paying these dividends indefinitely, the historical track record is strong. These quarterly dividends are a way of distributing profits to shareholders, so as long as the company continues doing well, you'll continue making money from your holdings. And if you don't like the idea of picking individual stocks, you can always invest in an index fund that focuses on dividend paying stocks.
- Bonds. There are many different kinds of bonds, but all of them pay a fixed percentage of interest for a designated term. These assets don't have the growth potential of stocks or real estate, but they're generally considered to be safer. Just like with dividend stocks, if you don't want to buy individual bonds and build your portfolio from scratch, you can always invest in a bond index fund.
- CDs. Certificates of deposit (CDs) are a special type of account that comes with interest rates higher than an average savings account and fixed terms. In exchange for not accessing your money for a specified period of time (like 2 years or 5 years), you can practically guarantee a fixed rate of return.
- Small business investing. You can also generate income for yourself by investing in a small business, whether you start it yourself or invest in someone else’s. For obvious reasons, this is a bit riskier than other options on this list, but it could pay off for you.
- Private lending. Peer lending is growing in popularity, so if you have the capital for it, it may be worth pursuing. Be sure to take the risks seriously when evaluating your options.
- High yield savings accounts. The rate of return isn't impressive, but in a high-yield savings account, you'll make more money than in a standard savings account. You can also count on your money remaining safe – and you can access it at any time.
No matter what, it's important to diversify your portfolio. Each of these assets has inherent strengths and weaknesses, and each could play a pivotal role in fleshing out your overall portfolio. But if you want to capitalize on the advantages while minimizing the risks, you'll need to distribute your holdings sufficiently.
If you want to know more about which investment is good for you, it's a good idea to employ the help of a professional who offers wealth management services.
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