The cost of living is continuously increasing. Affording daily necessities is becoming brutal such as gas for your vehicle or groceries. It’s challenging when you can only do so many things and work limited jobs to earn money. You might be hearing about passive income more these days because people are trying to find new ways of making money while living busy lives.
What Is Passive Income?
Passive income is earnings from investments such as rental property or limited partnerships. The person is not actively involved in these ventures but profits from them as a silent investor.
Why Should You Invest?
Investing can help you earn extra money while pursuing other things in life. Having a savings account isn’t enough most of the time. When it is time to pay for more important things in life, such as a down payment on a home or a child’s education, your savings can exhaust quickly.
To invest, you require capital. Those with some savings set aside can invest without worrying too much about the outcome. Everyone wants to earn extra money without having to work for it. Some have two or three jobs to sustain a living. However, sometimes, it can still be unaffordable. That is why investing in profitable options can allow you to earn money while focusing on your primary source of income.
The Power of Compounding
Compounding is when an investment generates income that you can further reinvest. The reinvestment then generates earnings which you can reinvest, repeating the pattern. So in simpler terms, compounding is investing profits made from other investments.
The Risk-Return Tradeoff
Every investment carries risk and potential returns.
Risk is the chance of receiving less than the amount you originally invested or no return at all.
Return is the amount you earn on the investment or the investment’s overall increase in value.
Each individual has different reasons and goals behind investing. You should make investment decisions based on why you require the extra funds and when you’ll need them.
Here is a list of a few popular investment options:
- Stocks
- Bonds
- Real estate
- Tax-advantaged accounts
- Microlending
Stocks
Stocks can be beneficial for most investors. That’s because stocks continue to prove to be reliable forms of income. This long-term investment delivers higher returns than bonds, saving yields, and gold in the U.S.
Stocks are proven excellent investments because being a stockholder means owning a business. A business grows and profits, and you do too. The more valuable the company becomes, the more the stockholder benefits.
Anyone can invest in stocks, but the amount depends on an individual. Young individuals should invest in multiple stocks as they can reap their benefits later in the future. Someone in their 70s should invest in a few stocks as the average American lives up to their 80s. Instead, they should invest in bonds and have more cash.
The two risks with investing in stocks are Volatility and Permanent losses.
- Volatility – Stock prices can fluctuate within short periods, making it risky to sell your stocks because you could lose the original value.
- Permanent Losses – Since stockholders are business owners, the stockholder is heavily affected if a business fails. Bond owners, contractors, vendors, and suppliers get repaid first when a company goes bankrupt. Stockholders come last on the list and get whatever is left if there is any.
To avoid volatility, you must research before investing. Invest in stocks with fewer chances of being affected by external events. For example, the COVID-19 pandemic was an uncertain event that heavily impacted stocks.
Avoid permanent losses by diversifying your investments. Do not invest all your funds into one stock because if that plummets, all your funds will bleed.
Bonds
Bonds are loans to a company or the government. The borrower uses the money to fund their needs, and the investor receives interest on it. The market value of a bond can change over time.
Bonds are fixed investments paid back to the investor with a regular amount, also known as a “coupon rate.” For example, a $10,000 bond can have a coupon rate of 5% for ten years, accumulating $10,500. After the maturity date, the borrower pays back the bond’s original $10,000 face value to the investor.
There are three main types of bonds:
- Corporate bonds – issued by companies
- Municipal bonds – issued by state and local governments
- Treasury notes, bonds, and bills – issued by the U.S government
Pros and Cons of Investing in Bonds:
Pros:
- Bonds are relatively safe. You can diversify your assets with them and reduce your risk.
- Bonds are a form of fixed income. They pay interest at regular and predictable rates through intervals.
Cons:
- They have low-interest rates. Long-term government bonds earn about 5% annually in interest. With lower risk, you also experience fewer returns.
- There is some risk. Investing in a bond is not entirely risk-free. You may have difficulty selling a bond if interest rates go up. Inflation can also affect your power to sell bonds. The fixed rate on your bond can become less valuable as time passes and inflation increases.
Real Estate
There are many ways you can profit from investing in real estate. If you can’t afford to purchase an entire commercial property, that’s not a problem. Real estate comes in all shapes and sizes, so you can make an investment that you can afford.
The down payment to purchase real estate can be high depending on the property. There are options to buy a property and resell it or rent it out to earn monthly income.
You can also invest through publicly traded real estate investment trusts (REITs). Through REITs, you can easily buy or sell shares. However, you may not be able to touch your capital until the project is complete. There is a slight risk of losing your money if the developer doesn’t execute everything timely.
Tax-Advantaged Accounts
Taxes can leave you short on funds, so investing in brokerage accounts that reduce taxes is a good idea. You can invest in these accounts that accumulate interest without worrying about paying taxes on your earnings.
Here is a list of accounts you can invest in where your money will grow tax-free:
- 401(k) – For employed retirement savers
- SEP IRA/SOLO 401(k) – For self-employed retirement savers
- Traditional IRA – For retirement savers
- ROTH IRA – For retirement savers
- Taxable Brokerage – For investors with additional cash
- Coverdell ESA – For college savers
- 529 College Savings – For college savers
Each account serves differently, and you must decide which one suits your needs best.
Microlending
Microlending is when lenders invest in microloans via an online platform. New or experienced investors can experience microloan investing any time from anywhere. The flexible and comfortable way of investing money online makes microlending a top choice for many new-age investors.
Investors use microlending apps to make profits on their investments. They can choose the amount they want to lend and whom.
Which Microlending Platform Should You Use?
First thing’s first. Do your research online. Microlending platforms are online systems. Therefore, all the information you need is accessible through their websites.
One of the most trusted microloan investing apps is Lendee, connecting borrowers and investors seamlessly. The process through Lendee is relatively simple. Once you sign up with Lendee, you can start investing almost immediately. Lendee offers all the information on borrowers so that you can decide where to put your money. You get to choose the terms and the profit you want to earn.
The application process is more straightforward and quicker than traditional lenders such as banks, credit unions, and credit card companies.
Invest as little as $100 if that’s what you’re comfortable with, or up to $2000 if you have extra cash. Since there are no middlemen, you have power over your money and can see quick returns.
