Worried about finances? Here are 5 income-generating assets you can leverage in ’22-’23
The right investments for you match your risk appetite.
- Some income-producing assets are riskier than others.
- The greater the potential reward, the greater the risk.
- Look at money market accounts, CDs, stocks and these other assets.
If the uncertainty of the past few years has left you yearning for investments that offer a steady, reasonably predictable income, you’re not alone. Part of maintaining a diversified portfolio includes maintaining income-generating assets.
What is an income producing asset?
In short, an income-generating asset is something that you pay money for today in the hope that it will generate income in the future. The goal is to identify the assets that will provide you with consistent, reliable and stable income over time. While some income-generating assets require daily attention, others are more passive. In other words, you don’t have to spend your days babysitting them once you’ve made the initial investment.
While there are many income-generating assets out there, here’s a snapshot of a few:
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1. Money Market Account
A money market account (MMA) is a bit of a hybrid. It falls somewhere between a traditional checking account and a high-yielding savings account. Like a checking account, you can access your account with a debit card. The difference is that you earn interest on the balance in the account. MMAs are available through banks and credit unions and are easy to open. The interest earned on the account varies according to market fluctuations. Because of the liquidity of an MMA, it is an excellent option for monies you have set aside for an emergency.
The downside is that MMAs don’t yield the interest rates you find in other, riskier investments. The benefit is that the FDIC insures the funds in an MMA.
Risk level: Low
2. Proof of Deposit
Another secure income generating asset is a Certificate of Deposit (CD). A CD is a type of fixed deposit, meaning you have to leave your money in the account for a set period of time in order to receive the promised interest rate. A CD is similar to a savings account, with two key differences. Firstly, you cannot withdraw the money without penalty before the CD is due. Second, CDs usually have a higher interest rate than you can earn on a traditional savings account.
Suppose you buy a two-year CD with an interest rate of 1.5%. To earn that 1.5% on the money, you have to keep it in the account for two years. If you withdraw the money early, there will be a penalty.
Risk level: Low
Suppose you buy 100 shares of Acme Brick Company at $10 each. When Acme is doing well and profits are growing, the value of your shares will increase. When Acme goes through a rough patch and profits fall, the value of your stock goes down. You could lose the entire $1,000 invested if things get really bad.
People invest in certain companies by buying stocks because they have researched the business and believe it will be successful. If they’re right, the value of their stock will increase.
Some companies also pay dividends, meaning they share a portion of their profits with shareholders. Owning stock in a successful company means enjoying the income that comes with dividends. You can use the money to pay for living expenses, reinvest it, or anything else you want.
Buying individual stocks should not be confused with investing in mutual funds. When you invest in a mutual fund, your money goes toward buying shares in multiple companies. That way, if one of the companies takes a nosedive, you always have the other companies to prop up the value of your account. Although mutual funds are not without risks, they are less risky than owning individual stocks.
Risk level: The stock market has performed well in the past, but there are no guarantees of future performance. You risk losing your investment.
4. Real estate
There are several ways to invest in real estate to generate income.
buy real estate
Buying real estate and using it as a rental property is one way to generate income, but it’s not without its potential problems. For example, you may get renters who frequently miss payments or buy a house that needs constant repairs. Still, owning real estate can be profitable for those willing to invest the time and money in an income-generating asset.
Risk level: Medium: Things could go either way. The saving grace is that you have the property to resell if the need arises.
If you’d rather not be so hands-on, you can invest in a real estate investment trust (REIT). Like a mutual fund, a REIT invests in various types of real estate, such as office buildings, storage units, parking garages, and apartment complexes. And like mutual funds, the risks associated with a REIT are spread. Even if one or two of the investments don’t fare well, there’s a chance the others will.
Risk level: Risky: How profitable real estate is depends on factors such as interest rates and the overall economy. You can expect fluctuations and lose your investment.
Another income-generating investment option is real estate crowdfunding. In short, crowdfunding is about adding your investment to a pool of money from other investors. You know in advance what type of property you are investing in. This can be, for example, residential buildings, commercial real estate or retail space. Once you invest, you own a share of the holding company.
Risk level: Risky: Borrowers don’t have to personally guarantee the loan, which means you could lose your investment if things go wrong.
5. Peer-to-Peer Lending
People who are denied bank loans often turn to peer-to-peer (P2P) lenders to borrow. As a P2P lender, you can decide which loans to lend and don’t have to fund the entire loan yourself. For example, you might come across someone who wants to borrow $10,000. You can borrow all or part of the amount. If other lenders pick up the rest, the loan application is approved.
Before you decide which loan to fund, you have access to information about the borrower, including their creditworthiness. The riskier the loan, the more interest the borrower is charged and the more interest you can earn. If you’d rather stick with lower-risk loans, you’ll still get interest at a lower percentage.
Risk level: Moderate: You retain some control over P2P lending by choosing which loans you want to participate in. However, some borrowers breach their contracts by not paying, and since no collateral is required, there is no way to recover your loss.
Other income-generating assets include investments in farmland, annuities, and bonds. However, before you invest, do your homework. Examine the good, bad, and ugly of each potential investment. It’s up to you to determine your risk tolerance and which investments best suit your style.
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