Worried About Finances? Here Are 5 Income-Generating Assets to Take Advantage of in '22-'23
- Some income-generating assets are riskier than others.
- The greater the potential reward, the higher the risk.
- Look into money market accounts, CDs, stocks, and these other assets.
The right investments for you fit your risk tolerance.
If the uncertainty of the past few years has left you longing for investments that provide steady, somewhat predictable income, you're not alone. Part of maintaining a diverse 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 hopes that it will produce income in the future. The goal is to identify the assets that will provide you with a consistent, dependable, stable income over time. While some income-generating assets require day-to-day attention, others are more passive. In other words, you won't have to spend your days babysitting them once you've made the initial investment.
While there are many income-generating assets available, here's a snapshot of a few:
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-interest savings account. Like a checking account, you can access your account with a debit card. The difference is that you'll earn interest on the funds in the account. MMAs are available through banks and credit unions and are easy to open. The interest earned on the account varies based on market fluctuations. Due to how liquid an MMA is, it's an excellent option for funds you've put away for an emergency.
The downside is that MMAs do not earn the interest rates you'll find in other, riskier investments. The upside is that the FDIC insures the funds in an MMA.
Risk level: Low
2. Certificate of deposit
Another safe income-generating asset is a certificate of deposit (CD). A CD is a type of time deposit, meaning you must leave your money in the account for a pre-set period to earn the promised interest rate. A CD is much like a savings account, with two significant differences. First, you cannot withdraw the funds before the CD matures without penalty. The second is that CDs typically have a higher interest rate than you can earn with a traditional savings account.
Let's say you purchase a two-year CD with an interest rate of 1.5%. To earn that 1.5% on the funds, you'll need to leave them in the account for two years. If you withdraw the money early, a penalty will be due.
Risk level: Low
Let's say you purchase 100 shares in the Acme Brick Company for $10 apiece. If Acme does well and profits are up, the value of your shares goes up. If Acme hits a rough patch and profits are down, the value of your shares goes down. You could lose the entire $1,000 invested if things get really bad.
People invest in specific companies by purchasing stock because they've researched the business and believe it will be successful. When they're right, the value of their stock increases.
Some companies also pay dividends, which means they share a portion of their profits with shareholders. Holding shares of a successful business's stock means enjoying the income associated with dividends. You can use the cash to pay living expenses, reinvest it, or anything else you’d like.
Buying individual stocks should not be confused with investing in mutual funds. When you invest in a mutual fund, your money goes toward buying stocks from several companies. That way, if one of the companies does a nose dive, you always have the other companies to shore up the value of your account. While mutual funds are not without risks, they are less risky than holding individual stocks.
Risk level: Historically, the stock market has done well, but there are no guarantees of future performance. You risk losing your investment.
4. Real estate
There are several ways investing in real estate can provide income.
Purchasing real estate and using it as rental property is one way to generate income, but it's not without potential problems. For example, you may get renters who frequently miss payments or buy a home that continually needs repairs. Still, owning real estate can be profitable for those willing to invest time and money into 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 real estate types, like office buildings, storage units, parking garages, and apartment complexes. And like mutual funds, the risks associated with a REIT are spread out. Even if one or two of the investments do not perform well, there's a chance the others will.
Risk level: Risky: How profitable real estate is depends on factors like interest rates and the economy as a whole. You can count on fluctuations and may lose your investment.
Another income-generating asset option is real estate crowdfunding. In a nutshell, crowdfunding involves adding your investment to a pool of money from other investors. You know in advance which type of property you're investing in. For example, it may be residential housing, commercial property, or retail space. Once you invest, you own a share of the holding.
Risk level: Risky: Borrowers are not required to personally guarantee the loan, meaning you could lose your investment if things go belly up.
5. Peer-to-Peer lending
People denied bank loans often turn to peer-to-peer (P2P) lenders to borrow. As a P2P lender, you get to decide which loans you're willing to make and do not have to fund the entire loan on your own. For example, you may run across someone who wants to borrow $10,000. You could loan the whole amount or a portion of it. If other lenders pick up the rest, the loan application is approved.
Before deciding which loan you'd like to help fund, you have access to information about the borrower, including their credit score. The riskier the loan, the more interest the borrower is charged and the more interest you can earn. If you'd prefer to stick with lower-risk loans, you'll still earn interest at a lower percentage rate.
Risk level: Moderate: You maintain some control with P2P loans by choosing which loans to take part in. However, some borrowers will break their contracts by not paying, and because no collateral is involved, there's no way to recoup your loss.
Other income-generating assets include investing in farmland, annuities, and bonds. Before investing, though, do your homework. Look into the good, bad, and ugly of each potential investment. It's up to you to determine your risk tolerance and which investments best fit your style.
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