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As you start to grow your net worth and stack money, you should consider putting your cash in multiple investment income types.
Certainly, you might not want to pursue all options right away or even at all.
But if you truly want to build wealth and plan out your financial future, generating income from your investments is the ultimate goal.
So what is investment income and what types are out there that you should know about?
Table of Contents
- What Is Investment Income?
- The Five Investment Income Types
- Which Investment Income Type is Right for You?
What Is Investment Income?
When it comes to making money, the majority of people earn income through doing work. Whether that is by being an employee for a company or through self-employment.
However, in order to generate even more money, you’ll want to create income off of investments too.
So what is investment income? This simply means that the money generated comes from an increase in value of the investments you own.
For me, the definition applies to anything you put your money into that then becomes an asset that generates more money, helps your net worth, and builds wealth.
Your investment income can be very impactful on your current and future finances. Plus, there can be preferential tax treatment on this income too, which varies pending on your tax bracket and location.
Want to keep track of your net worth and investment income much easier? I’d recommend creating your free account with Personal Capital. You can sign-up here.
The Five Investment Income Types
It’s important to be prepared as you look to grow your wealth and diversify your income streams.
Does it mean you should focus on every one of these below at once? Definitely not!
A great strategy is to master one first, then move on to the next. You could also pick the ones that are most attractive to you currently and focus your time there.
Ultimately, the investment income types you choose will depend on your financial interests and personal finance goals. That said, let’s dive into some of the best investment income options.
Interest Income
One of the most common investment income types is money that is generated through interest. This was briefly touch on in our recent interest rates post, but will cover more here.
In order to accrue interest, you deposit funds into interest-bearing investments. These items include CDs, bonds, savings accounts, and money market accounts.
By investing or putting money into these outlets, over time you’ll earn a set amount of interest income on those investments.
Traditionally, interest income used to be a top choice among people to safely stash their money.
However, gone are the days where interest from investments like CDs or savings accounts were close to 5%. Today, you’ll find good ones will range from 2-3% max, but many are fractions of percent up to 2%.
If you are interested in a good interest on savings, I’d consider the Savings Builder from CIT Bank, which includes over 2% interest on your cash. I did a whole product dive further if you’d like to learn more about their options.
Dividend Income
One of my personal favorites is dividend income and this can really add up as you invest more money (and factor in compound interest).
Dividend income refers to the distribution of earnings from companies to their shareholders from stocks or mutual funds. This income is taxed, but it depends where you have this money, like in a retirement account or IRA.
Payouts and how much can vary on what you are invested in and the companies. For instance, since most of my investments are in Index Funds, many of my dividends are on a quarterly basis. There are some that will pay monthly or annually as well.
One of my index funds pays quarterly and now I get over $200 in dividends each time, for doing nothing but having investment income in the fund! These are also tax deferred as they are in my retirement accounts.
I also have some dividend income in a money market account, but this is reported to the IRS when I do my taxes. If you are interested in more about dividends and living off of them, Investopedia has a great article here.
Besides stocks, you can make dividend income from real estate crowdfunding platforms. You have the chance to diversify your investments in real estate, without physically managing the properties.
Two great platforms to consider investing in:
- Groundfloor – Invest in single family and multi-family homes with as little as $10. Helps get you started. Get $10 towards your first investment here.
- Fundrise – Looking to invest in multi-million dollar deals with as little as $500? Fundrise is the most popular choice to diversify your money into real estate. Choose from investing plans based on your financial goals. Create your account here to get started.
Rental Income
Investing in real estate is a highly popular way many millionaires have built — and continue to — build wealth from. Many times it can be from flipping properties or holding on to property for years until the value goes up.
But a popular investment income type from real estate is generating money from renting to people or businesses.
This can be beneficial in many ways, as you can have other people paying down your mortgage or loans, while building equity.
However, investing in physical properties and renting them comes with risks and challenges. Your income flow is not always consistent and management of properties can be tiresome and costly.
If you are interested in this route, I’d highly recommend BiggerPockets which has some of the best information and a great forum about real estate investing and rental income.
Capital Gains Income
Another investment income type is through capital gains. A capital gain happens when there is an increase in value of an asset and that asset becomes worth more than the original purchase price.
The gain is then realized once you sell off the asset.
As with anything, when you realize a gain from selling, the income is also taxed and the rate depends on your tax bracket. And the longer you hold on to a gain without selling, the better it is for your taxes.
This means capital gains are broken into two categories:
- Long term capital gain – any asset realized that was held onto for over a year.
- Short term capital gain- any asset realized that was held for under a year.
Capital gains will typically come from selling stocks, bonds or from real estate investments at a profit.
But always remember the tax implications if you go to sell off an investment for a big gain.
Side Hustle Income
You might be wondering why side hustle income would be included as an investment type. Typically, that is more about making money, right?
While true, I still consider side hustles an investment income type because you are investing in a few things: like money into setting it up, time outside of your full-time job, and you are also investing in yourself.
So although it might not be a traditional option as the first four, I very much believe this one is important to include.
Plus your side hustle can pay you dividends for years and become a solid financial asset in the near future that you can either keep or sell for a profit. Here are a few side hustle ideas with full-time income potential.
Which Investment Income Type is Right for You?
The honest answer here is it all depends on you and your financial goals! That’s the beauty of personal finances is that, well, it’s personal and unique to you.
Even how you approach each investment income type might be different from the next person.
And some other things to consider when pursuing investment income includes where you are in life currently, your current tax bracket, where you think your future tax brackets might be, and what tax-deferred methods you are using, etc.
One thing I am a big proponent of is diversifying your income streams and having multiple avenues making you money.
So if your goal is to secure a great financial future or achieve financial independence quickly, these income streams will be crucial.
Are you pursuing multiple investment income types currently? Which ones do you like or are considering further? Let me know in the comments below.
