Through your investment activities, you understandably want to build wealth quickly. However, wealth building may not be your top goal. Are you dreaming about giving up your day job and living off of your investments? There are a few ways to accomplish this goal. For example, you could accumulate so much money in your retirement accounts that you can live off of the distributions. Another approach is to make investments that generate passive income. Numerous types of investments can generate passive streams of income, but some are more lucrative than others. Regardless of the type of passive investing activities that you participate in, understand that it likely will take a significant amount of time for you to fully develop these passive streams of income.
What It Takes to Live on Passive Streams of Income
If you intend to live off of passive income streams, there are a few important things that you need to be aware of. First, your sources should provide relatively stable income. As you research the these exciting investment opportunities more closely, you will notice that many income streams offer a varied range of risks. You should understand where the risks are for each type of investment before you begin allocating your funds to different types of assets.
Second, your sources of income should be relatively diversified. It can be stressful and risky to put your livelihood in the hands of one income stream. However, this does not mean that you need to invest in all of the different asset classes mentioned here. All of these asset classes hold many types of investment opportunities with varying returns and risks. You can choose to invest in only one or two asset classes and to diversify your holdings within these selected classes.
Top Passive Investing Opportunities
As a passive investor, your goal is to put your money to work for you so that you can work as little as possible. All passive investing opportunities will require some oversight and management, but the time commitment varies across the board. What are the passive opportunities available for wealth building and income generation?
Bonds and CDs
Bonds and CDs are generally the lowest-risk investment option on this list. A bond is essentially a loan that you give to a government entity or to a business. Bonds are slightly riskier than CDs because the entity could always fold. However, bonds and CDs may have a fixed rate of return, but the return is often lower than the return from other investment opportunities. Bonds and CDs generally require you to commit your funds to the investment for a period of time. Terms may range from a month to several years. Longer terms are associated with higher returns.
A common way to set up a passive stream of income from these investments is from a ladder. Essentially, you will purchase a series of these investments with varying term lengths. When one of these investments matures, you can use the return as income to live off of. Then, you can reinvest the lump sum of capital to continue your ladder. While some people have enough funds available to build a full ladder today, others will need to build their ladder slowly as funds are available.
The dividend rate on stocks varies from a fraction of a percentage point to over 4 percent. Riskier stock investments may have an even higher rate of return. Most stocks pay quarterly dividends, and you have the choice to reinvest the dividends through a DRIP program or to pull the dividends out as income. While you are building your dividend income stream, you can take advantage of synergy through a DRIP program.
One of the great things about dividend stocks is that the stock value may increase over time while you enjoy a relatively stable stream of income from them. This means that your wealth is growing while you are living off of the return. However, companies can change their dividend payout at any time. If you choose to build this type of income stream, look at the company’s history of adjusting its dividends before you make a final investment decision.
When many investors think about making investments to generate passive income streams, they think about buying income-producing real estate. This is a smart investment option that has several benefits not available with other investments listed here. For example, your property purchases can be leveraged with a residential or commercial real estate loan. The property’s income will usually cover the mortgage payment in full. Because of this, you will eventually own the property outright despite paying for only a fraction of its value out of your pocket. At the same time, the property’s value is appreciating, and you are taking advantage of incredible tax benefits to maximize your return on investment.
Through these factors you can build a sizable amount of cash rather quickly. At the same time, the property may generate steady income for you. With income-producing properties, there is always a risk that the tenant will stop paying rent. Turnover and vacancies also can impact the steadiness of your income stream. However, when you make smart tenant selections and invest in a good market, your exposure to these risks drops dramatically. The fact that your income is fixed from a lease for a specific amount of time creates a relatively steady stream of income.
Crowdfunding is one of the newer forms of investments that produce passive streams of income. There are various platforms that you can choose to find investments through. These may be personal loans to individuals, startup loans or business loans. You will be able to analyze the pre-determined creditworthiness of the applicant so that you can balance your exposure to risk with your desired return.
The primary risk associated with crowdfunding investments is the possibility that the borrower will default on the loan. One other factor to consider with crowdfunding investments is that your initial capital will not grow while you draw income from the loan. Therefore, if you intend to use the returns as income, you cannot consider this type of investment for wealth building.
As a business inventor, you can be an active investor with hands-on participation in the business, or you can be a passive investor. If you invest passively, you generally will have little or no say in business decisions. Essentially, you are lending the business money for a share of the profits indefinitely going forward. All business investments can be risky, but factors like the industry, the market and the experience of the active parties will impact your exposure to risk. It is possible to lose your full investment if the business folds.
On the other hand, you can build wealth while generating income through this type of investment. This is because your initial investment purchased an ownership stake in the company. As the business’s value grows, the value of your investment grows. You can potentially draw income from this investment for years, and you may see a sizable return when the company is sold or when your shares are bought out at a later date.
A Long-Term Approach Toward Building Your Net Worth
When some investors initially start generating passive streams of income, the inclination is to use these funds to support an improved lifestyle. However, if you want to eventually generate enough income passively to fully support your lifestyle, two things must happen. You must maintain your current lifestyle, and you must build up your streams of income. Essentially, you must continue living as you are while re-investing all returns from passive investments. This can have a powerful, synergistic effect. As you re-invest more of your returns in the development of passive streams of income, you will generate more income that you can later live on. You will also build a substantial amount of cash in the process.
Start Investing Passively Today
Unless you are already financially well-off and have an incredible nest egg to dip into, you will need to develop your streams of income slowly over time. Once you get started, you will be able to take advantage of re-investing your returns. Therefore, the best time to start investing is today. Regardless of how much money that you have available, start purchasing various types of investments that are affordable to you. Keep in mind that you can start by investing in a few stocks or CDs today. As your net worth grows, you can move up to property or business investments.
Living entirely off of passive streams of income can take time and hard work. However, this goal is within your reach. Start today, and you will reach your goal sooner.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.