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If you’re not investing in 2021, you need to rethink your priorities.
Investing is one of the best ways to build wealth and obtain financial freedom.
But with so many different investment opportunities out there, it’s important to have a clear understanding of the landscape before getting started to narrow down your choices.
For example, while some investments are made to appreciate over time, others are meant to become an additional income source (e.g., buying a laundromat).
Keep reading to learn more about income-generating assets and how they can help you achieve financial independence.
What’s an Income Generating Asset?
As the name suggests, an income generating asset is a type of investment that can generate profits.
There are many types of income generating assets on the market and where you allocate money depends largely on your preferences and needs.
Top Income Generating Assets
Here’s a breakdown of the top income generating assets on the market.
- Dividend stocks
- Exchange-traded funds (ETFs)
- Index funds and mutual funds
- Savings accounts
- Certificates of deposit (CDs)
- Real estate properties
- Media assets
- Small businesses
- Stock photos
- Solar panels
1. Dividend stocks
Dividend stocks are stocks that pay dividends to shareholders at periodic intervals. Dividend payments can be received in shares of the stock or cash.
Suppose a company offers a 5% dividend yield, and its stock holds steady at $20/share for the entire year. In this case, someone who owns 100 shares would have the option to either receive $1/share in cash or buy five additional shares through reinvestment over the course of a year.
Dividend stocks are a great way to increase your investment over time.
Of course, you shouldn’t pick stocks purely on their dividend yield. It’s also important to factor in their price-to-earnings ratio, price-to-book ratio, debt-to-equity ratio, and price/earnings-to-growth (PEG) ratio.
2. Exchange-traded funds (ETFs)
Investing in stocks involves buying them one at a time, a time-consuming, risky, and expensive process.
A different, safer approach is to buy funds. For example, exchange-traded funds (ETFs) can give you access to a variety of different stocks in one portfolio.
ETFs track various indexes, assets, and commodities. There are healthcare ETFs, telecommunications ETFs, construction ETFs, currency funds, and equity funds, to name a few. There are also ETFs that track indexes, like Vanguard’s $VTI ETF.
An investor can buy and sell ETFs with stock brokers like Schwab and Fidelity. Their prices rise and fall throughout the day. Most ETFs are passively managed, meaning they do not have active fund managers moving assets in and out. They are usually automated, but there are some exceptions (e.g., $ARKK, which is actively managed).
3. Index funds and mutual funds
Two other types of funds to explore are index funds and mutual funds, both of which involve collections of securities.
How index funds work
Index funds are passively managed and track specific benchmarks. The main difference between ETFs and index funds is that they are bought and sold based on their price at the end of the trading day. Index funds are usually low-cost and capable of producing strong returns over time.
How mutual funds work
On the other hand, a mutual fund is usually actively managed, meaning it has fund managers who move assets in and out of the portfolio on a regular basis.
While index funds and ETFs try to track indexes, mutual funds attempt to beat them. Yet, this strategy doesn’t always work. On top of that, mutual funds tend to cost more in fees because the fund manager takes a cut.
When buying a mutual fund, make sure to check out the expense ratio, which tells you how much of the fund goes towards growth.
4. Savings accounts
The idea of putting money into FDIC-insured savings accounts for growth is almost counterintuitive simply because interest rates are so low across the board.
At the time of writing, the highest interest rates are hovering around 0.40% APY to 0.50% APY, which isn’t stellar. At the same time, the lowest interest rates on the market are below 0.05% APY, which is downright shameful.
Yet, savings accounts with higher interest rates—known as high-yield savings accounts (HYSAs)—can still produce small returns. For example, if you park $25,000 in an HYSA offering 0.40% APY, you’ll net roughly $100 in interest at the end of the year. That’s assuming you don’t make any further contributions and that the interest rate stays put at 0.40%.
Another consideration is that U.S. savings accounts come with a transaction limit. Under Regulation D, banking customers can only make six withdrawals or transfers during a monthly billing cycle.
This can be frustrating if you frequently need to access your money. But at the same time, it can potentially reduce spending, leaving more money in your bank account instead of spending it all.
5. Certificates of deposit (CDs)
One of the frustrating parts about savings accounts is that they have variable interest rates that tend to plummet when the Federal Reserve slashes their rates. In the not-so-distant past, HYSAs were as high as 2.2% APY. This is no longer the case.
CDs, on the other hand, allow banking customers to lock in higher interest rates for set periods. For example, you can potentially lock in a six-month CD with an APY of 0.50%.
The upside to using CDs is that you can get a higher interest rate and avoid touching the money for a set period of time. The downside is that you’ll have to lock your money until the term ends. You can always take the money out and break the contract, but you’ll face stiff penalties and may lose all the interest you gained if you touch money prematurely.
CDs are great for customers who are fearful of declining interest rates and who don’t plan on touching their money for a set period of time.
If you prefer more liquidity, look into money market accounts instead, which tend to have higher interest rates than savings accounts but give you easier access to your money than CDs.
An annuity is a long-term investment. This type of asset is issued by an insurance provider.
When you buy an annuity, you can receive a fixed sum of money on an ongoing basis. It’s designed to provide income for life.
Annuities can be broken down into two groups.
This type of annuity involves making one lump-sum payment which is broken down into ongoing payments over a set period of time. When you buy an intermediate annuity, you can receive guaranteed income right away.
Deferred annuities involve making a lump-sum payment or paying premiums and receiving guaranteed payments at a later date.
When corporations and governments need to raise capital, they often issue bonds. When you buy a bond, you essentially buy debt from an issuer who agrees to pay back the principal with interest.
Bonds are generally secure investments because they tend to be less volatile than stocks. However, the downside is that you may have to wait for the bond certificate to expire to cash out. So, if you need liquid cash, be careful about putting money into bonds.
Here are some of the most common types of bonds.
Companies typically issue corporate bonds to investors to raise capital to expand their operations or fund mergers and acquisitions.
Treasury bonds are issued by the federal government to finance debt payments. These are one of the least risky bonds to buy.
High-yield bonds, or junk bonds, typically come from companies that have a higher risk of default. As a result, they usually have higher interest rates.
Municipal bonds, or munis, are bonds issued by local governments to raise funds for projects like bridges, roads, and railroad stations.
8. Real estate properties
There’s a big difference between buying a house to live in and real estate investing.
Here are some of the top real estate opportunities to consider.
Rental properties are real estate assets you purchase (e.g., a single-family home or a multi-family home) with the intention of renting to tenants. These properties can potentially generate residual income every time renters make payments.
There are short-term rental properties in vacation towns and long-term rental properties in towns and cities. You can also rent out your current space through Airbnb.
Commercial real estate
Commercial real estate can refer to office space, industrial centers, storefronts, and large residential properties like condos or apartment buildings.
Investors can purchase commercial real estate directly through a realtor or indirectly through a crowdfunding platform like Fundrise or CrowdStreet.
LoopNet is the top online marketplace for browsing direct commercial property deals.
A real estate investment trust (REIT) is a company that buys, manages, and sells commercial real estate and then offers shares to investors. A REIT can be bought and sold through brokerage firms just like a stock.
In order to achieve their favorable tax status, REITs are required to pay at least 90% of their taxable income to investors as dividends.
Investors who have a substantial amount of money sitting around in the bank should consider buying a franchise. One of the most common example is a fast-food chain (e.g., McDonald’s, Taco Bell, and Starbucks).
There is a lot of benefit to buying a franchise. First and foremost, you can make a lot of money. They also come with a very low failure rate, especially if you can start a franchise from a global brand in a strategic location.
Franchises also typically have business assistance programs and pre-set corporate marketing programs, making your job that much easier.
The amount you need for a down payment varies from franchise to franchise. National or global fast-food chains can run anywhere from $100,000 to $1 million or more. However, there are many smaller franchises you could get for around $10,000 to $20,000 that could be extremely profitable.
If you’re fortunate enough to own your own land or home, then you may have an opportunity to make money selling storage space. Take a look around your property to see if you have extra space you could rent out (e.g., your garage, basement, and attic).
You may also be able to make money renting your driveway or parking space. And if you have a big enough yard, you could even let someone store their boat or RV there.
11. Media assets
Creative types can make money writing books, recording music, or creating courses. Technically speaking, anything you create that earns money becomes an asset.
Look into a site like Amazon Kindle Direct, which allows you to self-publish books. Musicians should check out SoundCloud and Spotify. Any course creators should check out Teachable.
Even if a media asset only brings in a recurring $50 per month, these can quickly add up as you add more to your portfolio.
Car owners can turn their vehicles into income-generating assets in a variety of ways.
For example, if you get paid to drive for Uber or Lyft, your car becomes an income generating asset. But, it’s important to keep in mind that this isn’t passive income because you physically need to be in your car and driving around.
If you would rather not do the driving, consider renting your car on a site like Turo, a leading car rental app that lets you monetize your car by renting it to others. With Turo, all you have to do is create a listing and hand over the keys when someone rents your ride for a few hours.
Turo is also a potential solution for people with older vehicles that may not maintain great resale value. Instead of selling your vehicle, you can rent it full-time on Turo.
Websites can require a lot of work to set up. But once they’re up and running, they can be cash cows.
For example, you can make money with affiliate marketing and sponsorships on your website by connecting with aligned brands and companies within your space.
Another way to make money is through Google AdSense, which is a program that lets you run targeted advertisements on your website. Google AdSense can be a great way to monetize your website.
14. Small businesses
One of the best ways to increase your income stream is to launch your own business and become an entrepreneur.
Starting a business can be difficult and you may fail. Yet, the rewards can be significant. You’ll have total freedom to set your own schedule as the boss. Plus, you’ll have unlimited earning potential.
Consider starting a business in a field that you understand. For example, if you are great with animals, start a dog walking business. If you’re great with food, open a food truck.
Look for something with low overhead to save money and reduce risk. If you’re skilled as a graphic designer, you can start a business right out of your bedroom.
15. Stock photos
All you need is a high-quality smartphone camera and an eye for design, and you could potentially start making money selling stock photos.
To make money selling stock photos, you typically have to get accepted to a website like Shutterstock. This can involve submitting several images.
But if the site accepts your work, you can receive a cut every time someone downloads it. So, there is an opportunity to earn residual income from work.
16. Solar panels
Homeowners can simultaneously earn money and help the environment by embracing solar energy.
Switching to solar power can land you a federal tax credit at the time of writing. And in some states, homeowners who use solar panels can sell back excess energy they don’t use to their local power grid and receive payments.
Of course, solar panels can be very expensive. That being the case, it’s important to check the return on investment in your area before you fund this type of project.
Tips For Buying Income Generating Assets
Here are a few things to consider as you plan your investments.
Form a budget
It’s very easy to get carried away when investing. This holds true whether you’re pumping small amounts of money into the stock market and buying dividend stocks or if you’re building a website.
Form a budget and keep careful track of what you’re putting into your investment versus what you’re getting out of it. It’s also a good idea to set a limit for yourself so that you don’t go into debt trying to get rich.
Hire a tax advisor
As you start to invest and bring in more money, it becomes increasingly important to be savvy about taxes. This is particularly crucial if you’re working as a 1099 contractor, driving for Uber, or doing graphic design work.
Just be warned that self-employed individuals have to pay income tax along with a 15.3% self-employment tax. That being the case, investors should consider hiring a tax advisor to reduce taxes and pocket more money without crossing the Internal Revenue Service (IRS).
Check out our in-depth Federal Tax Guide for more information.
Just because an asset may look promising doesn’t mean it’s automatically going to rake in cash.
For example, you may have your eye on a stock with a strong dividend yield of 4%. However, a closer look may reveal that the payout is actually not so great because of high volatility.
Research the asset thoroughly and don’t be afraid to walk away from an investment if you’re not completely sold on it.
One of the best skills investors can learn is to assess value quickly. Investing opportunities don’t last forever and waiting too long could cause you to miss the boat.
Just look at people who sat on the sidelines early in 2020, when Bitcoin was hovering around $4,000 per coin. Over the next few months, the coin skyrocketed and eclipsed $60,000.
Keep liquid cash on hand
It’s also a good idea to keep liquid cash on hand so that you can fund investment opportunities when they arise.
There is nothing worse than being in a situation where you want to buy a certain asset but can’t fund it due to a lack of capital. Always have money at your disposal so you can act when you need to.
What To Do With Your Money
So what should you do with your money? Making money through income-producing assets is one thing. Keeping it is quite another. Remember that the secret to wealth isn’t making money but preserving it.
Pay down debt
Take a look at your debt load and figure out how much you’re allocating towards high interest credit card payments and student loans. Consider taking some of the money you generate and paying off your debt so that you can stop losing money each month and achieve stronger growth.
Open a retirement account
It’s a good idea to open a retirement account through a traditional IRA, Roth IRA, 401(k), or Roth 401(k). Self-employed individuals should also look into starting a solo 401(k) or simplified employee pension (SEP) IRA.
Putting money into tax-friendly retirement accounts can lead to deferred, tax-free growth.
Avoid frivolous spending
Another key to amassing wealth is to avoid spending money unnecessarily. Stick to a budget and buy items out of necessity, not out of desire. Think twice before buying a fancy car (unless you’re going to turn that car into an income producing asset by driving for Lyft and Uber, that is).
Modern budgeting systems like YNAB and Personal Capital can help you stay on top of where your money is going, and how your net worth is increasing over time.
Can’t-miss books for making money
There’s no shortage of literature available if you’re looking to make money. Check out these classics on Amazon for more insight.
Click Millionaires: Work Less, Live More with an Internet Business You Love by Scott Fox
In this book, Scott Fox explains how anyone can start an online business with little or no startup capital. If you’re looking to ditch the 9-5 life and become an entrepreneur, this book is a must-read.
The 4-Hour Workweek by Tim Ferriss
Another gem for people who simply don’t want to work is the 4-Hour Workweek, written by Tim Ferris. This book is a blueprint for people who want to live a semi-retired lifestyle at a young age while still generating buckets of cash.
The Six-Figure Second Income by David Lindahl and Jonathan Rozek
Authors David Lindahl and Jonathan Rozek explain how to start and grow a successful online business without quitting your day job in this fantastic tome. This is a great book for anyone who wants to start a side hustle online.
Many people want to start a side hustle but don’t know where to look. The cool part is that your next side hustle could be sitting right in front of you. Learn how to get started with your next money-making endeavor with this helpful guide.
Frequently Asked Questions
I want to buy an income producing asset. Where should I start?
Start by investing in low-risk investments that can allow you to learn as you go. For example, you don’t need to be a stock market expert to buy index funds. And you don’t need to be a real estate expert to buy REITs, either.
Start with broad and low-risk investments so that you make fewer mistakes as you go along. Then, work in more complicated investments like individual stocks and physical properties when you’re ready.
Whatever you do, you don’t want to go from zero to 100 and take on a ton of risk in a short period of time.
What is peer to peer lending?
Peer to peer lending services connect lenders with borrowers who need capital. These individuals may have a hard time securing traditional funding due to poor credit, so they turn to lending platforms to obtain financing for their personal needs.
Lenders have the opportunity to fund people in this situation by charging higher interest rates in exchange for catering to higher-risk individuals.
It’s a risky play, but you could potentially make a lot of money by engaging in peer to peer lending.
What is diversification?
Portfolio diversification is all about spreading money around to create different income streams and reduce risk. It may involve putting some money in stocks, bonds, index funds, real estate, and mutual funds.
Diversification is all about not putting all your eggs in one basket.
The Bottom Line
Here’s a disclaimer: If you want to invest and generate a strong cash flow with passive income, you need to take some risks along the way.
The best income-producing assets may require you to make some upfront investments. And that’s perfectly okay! Building wealth can be expensive.
In addition to cost, you may also need to wait a long time for steady returns. But if you’re willing to put in the effort, the annual returns can be well worth it. In fact, investing can be one of the best personal finance decisions you make in life.
At the end of the day, beginners should focus on building a diverse investment portfolio with a healthy mix of blue-chip stocks, rental income from REITs, ETFs, and low-cost mutual and index funds.
Use the above-mentioned list to start investing and increasing your net worth. Over time, being an investor will get easier as you bring in more profits.
Either way, the most important thing you can do is to get started. So what are you waiting for? Stop delaying your plans and start investing in income generating assets today.