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Want a passive way to build wealth? Then it's time to learn how to invest for income. It will take time and patience, but the rewards are great.
Have you been looking for ways to diversify your financial portfolio? Or perhaps you’re just learning the intricacies of financial literacy. Whether you’re 25 and building your career or close to retirement and ready to settle down, investing for income is an excellent choice for financial health and security.

Income investing gives you the ability to generate cash and slowly build wealth over time. In our get-rich-quick culture, it can be difficult to remember that useful proverb, “slow and steady wins the race.” Instead, we embrace the phrase “high risk, high (and fast) reward.” Investing for income teaches you to think methodically rather than impatiently about your finances.

Everyone deserves the opportunity to generate income and build wealth. If learning about investing feels daunting to you, don’t worry, I’ll break down the basics in this article. Let’s first take a look at what exactly income investing is.

If you are really eager to start investing, one of our recommended choices is Wealthfront. They have an easily attainable minimum balance, low fees, and a simple, convenient interface. They're a great choice to start investing easily and quickly.

Income Investing: What is it?

When some people think of investing, they might think of active traders on Wall Street or someone sitting behind a computer analyzing incredibly-complex data. We tend to associate wealth with people who are already wealthy, making financial literacy and abundance feel impossible. However, as inaccessible as wealth may seem, research comes at no cost, and anyone can learn about investing.

The key to income investing is to put together a portfolio of assets, such as mutual bonds and real estate, that will generate annual income at low risk. You want to slowly, but surely, build your wealth while keeping your financial expectations in check.

Related: How to Start Investing with just $100

Investors put together a collection of stocks and bonds that they can count on to generate cash each year while requiring very little maintenance. Eventually, this portfolio will create “passive income,” or money that generates consistently without effort from the investor.

While the end goal of passive income can feel unachievable, think about the process in a practical sense. I don’t encourage you to quit your day job immediately to rely on investing. Building wealth is a marathon, not a sprint to the finish line.

If you begin to learn about income investing now, especially if you are young, you’re less likely to feel financial strain when you are closer to retirement.

The Basics of Investing: How to Get Started

If you’re new to investing, let’s start at the beginning. Investing essentially means committing money in order to earn a greater financial return in the long run. This idea can apply to many aspects of building a career outside of the stock market.

Think about if you’re a photographer and you invest $400 in a new camera. With your upgraded quality, you’re able to charge more for your photos. You quickly make back much more than the cost of your camera. You invested in your work and you made more money as a result.

In essence, investing can function similarly. If you pay $100 for a stock and the company continues to do well financially, you will make more than what you initially paid over time (this is assuming the stock moves with that financial success, which isn’t a guarantee). Eventually, you can sell your stock at a much higher price than your initial investment.

Conversely, if that same company were to go under and the stock value tanked, you can lose your money. Because of this, it’s important to make sure you do proper stock research.

Saving vs. Investing

While saving and investing are both valuable and necessary, many people don’t understand the difference between the two. Some think one is better than the other. This is not the case. Consider saving and investing for maximum financial health. These are some of the differences between the two:

  • Savings interest: While you may make a small percentage of interest on the money in your savings account, you will not generate substantial income. The beauty of saving money is that you can access it easily. You’ll essentially never lose money unless you spend it. Chime offers a terrific online savings and checking account geared toward savers.
  • Investment interest: An investment account has no set rate of interest. The amount of return depends on how well the companies you invest in do. During good economic times, you might see something like double-digit gains on your investment. During economically challenging times (i.e., COVID-19) you may see a lot less, or even a loss.

To summarize briefly, investing carries a higher risk but more opportunity for passive income. Financial growth through savings carries little risk but relies solely on your ability to work and save.

Brokerage Services

In order to invest, you need to go through a brokerage. Many investors buy and sell stocks through a financial advisor like Paladin, too. While a reliable option, if you are new to investing you may not be able to afford to hire a financial advisor.

In the past ten years, investing has become far more accessible. There is a range of brokerage services including affordable and easy-to-use apps. These are a list of apps that allow you to directly buy and sell stocks:

Best Online Discount Brokers

  • You Invest by J.P. Morgan: Best for free trades and cash bonuses.
  • Ally InvestBest for new investors and those looking for a very easy website to navigate.
  • TD AmeritradeIdeal for more experienced traders looking for a rich set of tools and resources.
  • E*TRADE: Offers trading platforms and tools for any investment style.
  • Robinhood: Easy to use app 100% commission-free stock trading.

Index Funds

Index funds are safe investment options, particularly for beginners. Many new investors experience the allure of getting rich quickly and choose to invest in riskier stocks rather than researching the market. An index fund essentially does that research for you.

Index funds are a collection of companies that are consistently financially prosperous according to the market. They are created to track the Dow Jones and S&P 500, among other sectors and indexes. They show investors the safest options for investment.

Individualize Your Financial Plan

When researching an investment, you may come across financial plans that “guarantee wealth for anyone.” It is important to tailor your financial plan to your individual needs. If you don’t have substantial savings, investing in a hundred different high-risk stocks is a terrible idea. If you’re early in the process of building wealth, start small and continue to research your options.

In the same line of thought, consider your goals. Are you saving for retirement? Invest in the 401(k) account offered by your employer. You can also open a personal retirement account through an IRA. It is important to research the most effective methods of investing to attain your goals.

Financial Health: Many Kinds of Investments

Now that I’ve covered the basics of investing, I’ll return to investing for income. Income investing means building a portfolio of diversified assets that generate enough money to consider income. This is a helpful option for those approaching retirement. These assets will continue to give you access to cash even when you no longer work.

The following are some viable options to build your financial portfolio:

Bonds

Bonds are about the long game. They provide a more predictable income. If you pay $100 for a bond and it is set to mature in 18 years, you’ll receive the money you invested back in that amount of time (but you’ll earn interest along the way). If you let the bonds mature past 18 years, it will start to accrue more money than your initial investment.

Dividend Stocks

Dividends refer to cash payments that you will typically receive quarterly. Companies either reinvest their profits into the company, pay it back to their shareholders as a dividend, or some combination of the two. Some companies pay a dividend, some don’t.

Related: What You Need to Know About Dividend Investing

Since the money you gain from dividend stocks is legally considered income, those earnings will be taxed. However, your earnings will not be taxed at as high a rate as a paycheck you receive from a traditional job.

Preferred Stock

Preferred stock functions as a hybrid between bonds and stocks. Unlike bonds, preferred stocks’ value fluctuates depending on the state of the market. They present slightly more risk because of the market’s influence. As the name suggests, you will be required to invest a certain (and usually higher) amount to qualify for these higher-earning stocks.

Real Estate

Investing in property is a helpful way to accrue passive income as real estate provides multiple options for economic gain. If you buy property, you can rent it privately or through travel companies such as Airbnb. You also have the option of using the property that you own for personal needs.

Owning property presents a challenge of accessibility as it requires a lot of money upfront. Many take the risk of buying real estate with a loan.

Often property owners already have wealth available to them before they buy real estate. For others, the rewards of owning property can absolutely outweigh the initial cost. If you are in a strong financial position, buying real estate is an excellent option for passive income.

You can also invest in REITs, which will give you some liquidity. And better yet, if you want to invest in actual real estate but don’t want to manage the property (or you want exposure to commercial real estate) you can invest in something like Fundrise.

Asset Allocation Funds

If you can’t decide what investments you would like to make, you might consider an asset allocation fund (you might see them as “Target Date Funds” in your 401(k) as well). These provide investors with a diversified portfolio, including stocks and bonds. Typically, a financial advisor will create the asset allocation fund for you. They will cater to your risk tolerance when building your portfolio.

Bottom Line

Learning about investing can only yield positive growth in your financial health. If you take the time to research the most fruitful options, you will see considerable gain in wealth over time. Remember, the get-rich-quick mentality can lead to rash decision-making and significant loss.

Once you achieve the financial stability to invest in higher priced options such as real estate and preferred stocks, you will begin to experience the benefits of passive income.

Author Bio

Total Articles: 111
Chris has an MBA with a focus in advanced investments and has been writing about all things personal finance since 2015. He’s also built and run a digital marketing agency, focusing on content marketing, copywriting, and SEO, since 2016.

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