The key to building sustainable, lasting wealth is to have multiple streams of passive income.
The more streams of passive income you own, the more security you will have if anything goes wrong. For example, if you have three streams of income, and each stream can take care of all your expenses by itself, even two of the streams completely fail for whatever reason, you’ll still be able to cover your expenses. More streams equals more security.
Let’s take a look at 5 different streams of income that you can start building, or continue to build, today:
1. Dividend Stocks
Dividend stocks are one of the easiest ways to build passive income. All you have to do is buy shares of stock that offer dividends. Over time, your income stream should grow with your portfolio.
You can start a dividend income stream with a small investment into a mutual fund. You can also invest in a drip program that allows you to buy discounted dividend stocks for certain companies that offer it.
Typically, dividend funds, like Vanguard’s VHYAX, offer around 3.5% annual yields. But, as with any investment, it depends on the type of companies that are in the fund since differing levels of diversity are going to change your expected return. It also depends on the performance of those companies in the fund, which can technically change at any point.
You can also choose to actively manage your stocks or take a more passive approach by buying index funds that spread their fund across many different companies offering many different dividends. This is usually the best way to diversify your holdings and prevent taking on unnecessary market risk. If you’re unsure about which strategy to use, you should definitely meet with a licensed financial professional to get the best investment strategy for your needs.
Although broader index funds are one of the best ways to eliminate market risk through diversification, if you want to pick your own stocks, consider something like Robinhood or Webull for commission free stock trading. Use this link to sign up for Robinhood and get a free stock once your application is approved. You can use Robinhood to invest in ETFs as well, which are similar to mutual funds but can be traded on the open market like individual stocks!
2. Rental Real Estate
Another tried-and-true way to get passive income is through real estate investing. Simply put, the investor buys real estate and then rents it out to tenants. That rent is used to pay down the mortgage overtime and ideally throws off some extra cash flow that can be used for other investments in the meantime.
As your real estate portfolio grows, you’ll be able to buy bigger and better properties with higher cash flows and more wealth building potential. When the mortgages are paid off, you’ll have even more flexibility because you can choose to re-leverage the equity by taking out a line of credit or other mortgage on the property. Or you can sell the property take the money out that way. Of course, you can just hold the property as well and enjoy the big boost to your cash flow and the other benefits of real estate investing, like appreciation and tax depreciation!
There are many different ways to get started with real estate investing. You can use your own money or someone else’s money through many different types of loans to acquire properties that can get you on the road towards financial Independence.
Alternatively, you can buy “shares” of rental properties through products like real estate investment trusts (REITs). REITs are a solid way to diversify your income portfolio without having to jump headlong into a property. While the payoff might not be as high in many cases, they are a very useful option nonetheless.
3. Intellectual Property
This third way to generate passive income involves a lot more time upfront but not necessarily as much money. This is through creating and monetizing your own intellectual property.
Intellectual property can include books, blogs, YouTube videos, podcasts, courses, patents, and anything that’s solely of your creation that you own the rights to. You can also choose to buy these things from inventors or by having someone else write a book on your behalf, for example. As long as you own the rights, it’s yours.
Intellectual property can take a long time to create, and it may take a long time to make it profitable. Even so, over time, you can create a substantial stream of income by having a lot of intellectual property out there for sale.
It might not be “passive” at the start for most, but it is still a potentially very powerful way to diversify your income streams.
4. Lending
Lending your money is another way to create a consistent stream of passive income.
When you lend someone money, you charge them interest on the loan, just as a bank would. You can potentially sell the note to someone else, although this can be difficult with larger loans since it may be hard to find a willing buyer.
Traditionally, the only way to lend to other people was to directly give them a loan with a promissory note and that was it. Today, companies like LendingClub give you the potential to invest across thousands of notes at varying interest rates to diversify your portfolio. Most of their notes are between 3 to 5 years in length. During that time, you earn interest payments which can help to build your income stream.
If you sign up with this link, depending on how much you use to fund your account, LendingClub will give you an investment credit to help jump start your loan portfolio!
5. Bonds
In a way, bonds really are not any different than your lending stream. You are lending money to a corporation or government entity which promises to pay you back with interest.
Bonds generally have lower returns that stocks and other investment products. As with any investment, generally, the lower the risk the lower the reward. Having a sizable number of bonds in your portfolio can help to lower risk, but it may lower some of your potential reward as well.
Bonds, however, can be more easily sold in the event that you need to liquidate. With regular notes, you would need to find someone willing to take on your spot on the loan and thus the risk. On the other hand, bonds can usually be sold much more quickly on the open market, much like stocks.
Important Considerations
Income from investments is often taxed at higher levels than capital gains. Sometimes, tax treatment may be favorable, but it is unlikely to be as low as the capital gains rate. Consult with a tax specialist to understand how to optimize your tax strategy that is consistent with your goals.
The types of income streams listed above are not the only products out there. For lower risk portfolios, you might consider products like CDs or high interest savings accounts with the goal of preserving wealth rather than increased income. Whatever your strategy, be sure to try and diversify to prevent unnecessary risk. Again, consult with a licensed financial professional to determine what strategy is best for you.
Income focused investing is only one part of a balanced portfolio. You likely should consider investing in equity focused stocks and funds in addition to dividend focused stocks and funds, for example. Always explore your options fully before committing to an investment strategy.
Conclusion
Creating a sizable income portfolio is one of the best ways to achieve financial freedom through investing.
By diversifying your income streams across multiple types of investments, you will be able to lower the risk of having one of the income streams failing. Even if one fails, you will have the others to keep you moving forward. You are simply creating different options for yourself.
These income streams can take a long time to build up, but the payoff can be well worth it. Financial freedom can be achieved with a steady and consistent investment strategy. If you haven’t started, the time is now!