When you begin to build your net worth, and accumulate money, it is important that you consider investing your cash in a variety of investment incomes.
You may not wish to explore all your options immediately or at all.
If you want to plan your financial future and build wealth, the goal is to generate income from your investment.
What is investment income? And what are the different types of it that you need to know about?
Table of Contents
What is Investment Income?
The Five Types of Investment Income
What type of investment income is right for you?
What is Investment Income?
Most people make money by working. It doesn’t matter if you are an employee or self-employed.
You can also generate income from investments to increase your earnings.
What is investment income? The money you earn is derived from the increase in the value of your investments.
The definition of wealth for me is anything that you invest in that becomes an asset and generates money, increases your net worth, or builds wealth.
Your investment income has a significant impact on your financial situation, both now and in the future. This income can also be taxed at a lower rate depending on your tax bracket.
You can easily track your investment income and net worth. Personal Capital is a great place to start. Sign up here.
Five Investment Income Types that will Help You Build Wealth
The Five Types of Investment Income
As you seek to diversify and grow your income, it’s essential to be prepared.
Do you mean that you need to focus on all of the below items at once? No, you should not!
You can also choose the ones that you find most appealing and focus your time there. You can also choose the ones you find most appealing and spend your time there.
The types of investment income you choose will ultimately depend on your personal financial goals and interests. Let’s look at some of the most popular investment income options.
Interest Income
Interest is one of the most common sources of investment income. We briefly touched on this in our post about interest rates, but we will go into more detail here.
In order to accrue interest, you deposit funds into interest-bearing investments. These include CDs and bonds, as well as savings accounts and money market account.
You can earn interest on your investments by investing in these outlets.
Interest income has traditionally been a popular way for people to store their money.
Today, interest rates on CDs and savings accounts are much lower than 5%. You’ll find that the best ones today range between 2-3% maximum, but most are fractions up to 2%.
If you’re looking for a high-interest savings account, the Savings Builder by CIT Bank offers over 2% on your cash. If you want to know more about the options, I’ve done a full product dive.
Dividend Income
Dividend income is one of my favorites. It can add up quickly as you invest (and compound interest is taken into account).
Dividend income is the amount of money distributed by companies from their stocks or mutual funds to their shareholders. The income you receive is taxed. However, it all depends on where the money is located, such as in a retirement or IRA account.
The amount of payouts can depend on the company and what you have invested in. Since most of my investment is in Index Funds many of my quarterly dividends come from them. Some will also pay out monthly or annually.
Since I have invested in my index fund, I receive over $200 each quarter in dividends. They are also tax-deferred because they are in my retirement account.
When I file my taxes, I report the dividends I receive in my money market account to the IRS. Investopedia’s article on dividends, and how to live off them, is a good place to start.
You can also earn dividends from crowdfunding platforms for real estate. You can diversify your real estate investments without having to manage the properties.
Consider investing in these two platforms:
Groundfloor – Invest as little as 10 dollars in single-family and multi-family properties. Helps get you started. Here you can get $10 off your first investment.
Want to invest as little as $500 in deals worth millions of dollars? Fundrise is the answer. Fundrise is a popular way to invest in real estate. You can choose from a variety of investment plans that are based on your personal financial goals. Click here to create your account.
Rental Income
Many millionaires continue to build their wealth by investing in real estate. It can come from flipping property or holding onto a property for many years until its value increases.
Renting out real estate to individuals or businesses is one of the most popular ways to generate income from investing in real estate.
You can build equity while others pay down your loan or mortgage.
Investing in and renting out physical properties comes with challenges and risks. The income you receive is not consistent, and managing properties can be expensive and tiresome.
If you’re interested in taking this route, BiggerPockets has some of best information about real estate investment and rental income.
Capital Gains Income
Capital gains are another type of investment income. Capital gains are when the value of an asset increases and it is worth more than its original purchase price.
Once you sell the asset, the gain will be realized.
The tax rate is determined by your tax bracket. The longer you keep a gain, without selling it, the more tax-efficient your situation is.
Capital gains can be divided into two types:
Long-term capital gain is any asset that has been held for more than a year.
Capital gain on short term assets is any asset that has been held for less than a year.
Capital gains are typically derived from the sale of stocks, bonds, or real estate at a profit.
Remember the tax implications when you sell an investment that has made a large gain.
Earn Side Income Through Side Jobs
You may wonder why side hustles income is included in the investment category. It’s more about earning money, right.
Although true, I still think of side hustles as investment income because you invest in several things, such as money to set it up, your time away from your full-time work, and also in yourself.
This is a very important option to include, even though it may not be as traditional as the other four.
Plus, your side hustle will pay dividends over the years. It can become an asset that you can keep or sell at a profit. Here are some side hustles that can lead to a full-time job.
What type of investment income is right for you?
It all depends on your goals and how you want to spend your money. Personal finance is unique and personal to each individual.
You may approach different types of investment income.
Other things to think about when you pursue investment income include where you currently are in your life, your current tax bracket and where you believe your future tax brackets will be. Also, what tax-deferred strategies you use, etc.
Diversifying your income streams is something I strongly believe in.
If you want to achieve financial independence or a secure financial future, then these income streams are crucial.
