The right investments for you match your risk tolerance.
- Some income-generating assets are riskier than others.
- The greater the potential reward, the greater the risk.
- Look into money market accounts, CDs, stocks and these other assets.
If the uncertainty of the past few years has made you want investments that provide stable and somewhat predictable income, you’re not alone. Part of maintaining a diversified portfolio includes maintaining income-generating assets.
What is an income-generating asset?
In a nutshell, an income-generating asset is something you pay money for today in the hope that it will produce income in the future. The objective is to identify the assets that will provide you with a constant, reliable and stable income over time. While some income-generating assets require daily attention, others are more passive. In other words, you won’t have to spend your days keeping them once you’ve made the initial investment.
Although there are many income-generating assets, here is an overview of a few:
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1. Money market account
A money market (MMA) account is a bit of a hybrid. It sits somewhere between a traditional checking account and a high-interest savings account. Like a checking account, you can access your account with a debit card. The difference is that you will earn interest on the funds in the account. MMAs are available at banks and credit unions and are easy to open. Interest earned on the account varies with market fluctuations. Due to the liquidity of an MMA, it is a great option for funds you have set aside for emergencies.
The downside is that MMAs don’t pay the interest rates you’ll find in other, riskier investments. The advantage is that the FDIC insures the funds in an MMA.
Risk level: Down
2. Certificate of deposit
Another safe income-generating asset is a certificate of deposit (CD). A CD is a type of term deposit, which means you have to leave your money in the account for a predefined period of time to earn the promised interest rate. A CD is very similar to a savings account, with two important differences. First, you cannot withdraw the funds before the CD matures without penalty. The second is that CDs generally have a higher interest rate than you can earn with a traditional savings account.
Let’s say you buy a two-year CD with an interest rate of 1.5%. To earn this 1.5% on the funds, you will need to leave them in the account for two years. If you withdraw the money earlier, a penalty will be due.
Risk level: Down
Let’s say you buy 100 shares of Acme Brick Company for $10 each. If Acme is doing well and earnings are increasing, your stock value will increase. If Acme struggles and earnings decline, your stock value drops. You could lose the entire $1,000 invested if things go really bad.
People invest in specific companies by buying stocks because they have researched the company and believe it will succeed. When they are right, the value of their actions increases.
Some companies also pay dividends, which means they share a portion of their profits with shareholders. Owning shares of a successful company means enjoying the income associated with dividends. You can use the money to pay your living expenses, reinvest it, or do whatever you want.
Buying individual stocks should not be confused with investing in mutual funds. When you invest in a mutual fund, your money is used to buy shares of several companies. This way, if one of the companies takes a nose dive, you still have the other companies to shore up your account value. Although mutual funds are not without risk, they are less risky than owning individual stocks.
Risk level: Historically, the stock market has done well, but there is no guarantee of future performance. You risk losing your investment.
4. Real Estate
There are several ways investing in real estate can generate income.
Buy a property
Buying real estate and using it as a rental property is one way to generate income, but it’s not without potential problems. For example, you may have tenants who frequently miss payments or buy a house that continually needs repairs. Still, owning real estate can be profitable for those who want to invest 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 needed.
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 different 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 perform well, there’s a chance the others will.
Risk level: Risky: The profitability of real estate depends on factors such as interest rates and the economy as a whole. You can rely on fluctuations and risk losing your investment.
Another income-generating asset option is real estate crowdfunding. In a nutshell, crowdfunding is adding your investment to a pool of money from other investors. You know in advance what type of property you are investing in. For example, it can be residential housing, commercial property, or commercial space. Once you invest, you own a share of the stake.
Risk level: Risky: Borrowers aren’t required to personally guarantee the loan, which means you could lose your investment if things go wrong.
5. Loan between individuals
People who are denied bank loans often turn to peer-to-peer (P2P) lenders to borrow. As a P2P lender, you decide which loans you’re willing to make and you don’t have to fund the entire loan yourself. For example, you may meet someone who wants to borrow $10,000. You can lend the whole amount or part of it. If other lenders take the rest, the loan application is approved.
Before deciding which loan you want to help finance, you have access to information about the borrower, including their credit score. The riskier the loan, the more interest the borrower pays and the more interest you can earn. If you prefer to stick with low-risk loans, you’ll still earn interest at a lower percentage rate.
Risk level: Moderate: You retain some control with P2P lending by choosing which lending you want to participate in. However, some borrowers will breach their contracts by not paying, and since no collateral is involved, there is no way to recover your loss.
Other income-generating assets include investments in farmland, annuities and bonds. Before investing, however, do your homework. Examine the good, bad and ugly of each potential investment. It’s up to you to determine your risk tolerance and the investments that best suit your style.
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