In our last investment income article we talked about how you might use your newly found income to fund hobbies or other enjoyable pursuits that might also bring you some return or help you improve the value of property you already own. If you read the first article and skipped that one, you may have already decided to spend it all! If not, you could be on the right track to making your money work for you.
How you approach this, however, will depend significantly on what your current lifestyle is like. For the purposes of this article, we’ll assume that you still work a full-time job and have friends, family and recreational pursuits that take up a significant portion of your spare time. If this is the case, you’ll probably lean more towards passive investments that don’t require a lot of time from you.
So which investments are perfect for someone who is looking to fund them with disposable investment income? The possibilities are vast, but the first thing most people consider is usually something traditional like a stock portfolio to supplement the growth of tax-deferred retirement vehicles. Depending on what their retirement funding options are, some savers will spend the extra income and simply increase the amount of money they send to their tax-deferred retirement accounts every month or quarter.
Funding retirement accounts is important, but in line with the motivation for writing this series, so is the practice of diversifying one’s methods of investing. Investment income can be used to slowly build ownership of hard assets that are expected to produce further income, undergo capital appreciation, or both. One asset that is typically purchased with the expectation of both is investment real estate. However, many real estate investors in the last decade have learned that they cannot always rely on the income from their investment properties to cover the costs of those very same properties. Using pre-existing investment income to build a larger down payment and to pay mortgage payments while the home earns income can greatly reduce the risk involved with owning rental properties. Reducing your monthly mortgage liability and using income from a non-correlated investment to cover it can mean the difference between a profitable year, a negative one, or even forced liquidation in some cases. Rental properties can cause “capital calls” that require owners to sink large amounts of money into a home to satisfy tenant laws. Even a few months without a tenant can cause financial strain without a large slush fund or additional income to cover the investment property mortgage. Covering that mortgage indefinitely can relieve the stress of getting in a bind looking for new tenants or if a situation arises where you need to evict someone without causing yourself hardship.
If houses aren’t your thing, how about another passive investment? What other investments can you get involved with which don’t require a great deal of time spent? Perhaps you have a friend that is looking to create a business or product. He has a great idea and a sound plan but needs funding. Your capital contribution could make it a reality, and earn you a stake in a business that provides equity growth and income for you with no work on your part. There are other small businesses that require a royalty to be paid and are relatively low maintenance – allowing you to operate them in your spare time or hire a part time employee to manage them for you. Owning ATM machines, DVD kiosks, or vending machines could require you to pay for licensing and supportive services, but the income from your other investments could help you get started on a fleet of machines that produce even more income for you and can be sold as a business down the road.
If you have an idea, write it down and work on it. If it requires you to put some capital forward, work towards getting in a position to fund it. Whether that means working a little more or finding that provides you with some income, you may be better off using existing savings to create income to fund a project, instead of simply pouring the savings into that project. Stay tuned for part IV when we talk about the benefits of using investment income to pursue some more involved business opportunities.