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Passive Income: A Few Options


Below is a look at specific types of passive income to help you determine which might fit best with your unique situation and goals.

Interest on a savings account or certificate of deposit (CD)

Description: A financial institution pays you a small amount of money at regular intervals or at the end of a defined period to keep your funds in an account.

Risk Level: The risk is very low; savings accounts and CDs at banks and credit unions are insured up to $250,000 per person per account as long as the financial institution is a member with the FDIC (for banks) or NCUA (for credit unions).

Possible Return: Investing in savings accounts or CDs offers a low-risk option for growing your money. However, it is important to note that the returns from these accounts typically reflect their conservative nature.

Initial Investment Size: The amount is flexible and can be small if necessary.

Liquidity: Most savings accounts allow you to access your money whenever you want. Since CDs are designed to pay your yield after a pre-determined period, if you withdraw the money early, you will face penalties.

Work Required: With the ability to do transactions online, the investment of time and labor is minimal. There is very little ongoing effort necessary.

Skillsets Needed: A basic understanding of financial transactions and patience will help.

Other Possible Pros: CD laddering is a strategy that can allow you to realize greater liquidity for your funds by splitting up your money among CDs with different maturity dates rather than putting all your money in one CD.

Other Possible Cons: Because the return on savings accounts and CDs is relatively low, you might miss out on higher returns from other investments.

Interest from a bond investment

Description: A bond is a debt investment in which an organization, like a corporation or government, issues an IOU to pay back the money you have lent them after a certain amount of time with a fixed or variable amount of income tacked on to the repayment.

Risk Level: While they are generally considered to be on the safer end of the investment spectrum, bonds can carry some risk of not receiving the return you expected. As with any investment, it’s exceedingly important to thoroughly research the possible dangers of committing your money.

Possible Return: Because of the variability within the bond investment class, it is difficult to put one number to the returns that bonds tend to produce. However, historically, bonds have been seen as yielding greater returns than savings accounts but less than stocks.

Initial Investment Size: Individual bonds typically start at $1,000, but bond funds can be invested in for far less and can give you the benefit of diversification.

Liquidity: Bonds are considered liquid assets because they can easily be bought and sold.

Work Required: As mentioned, much research is necessary to understand the intricacies of bond investing.

Skillsets Needed: Since we’re talking about passive income, we’ll assume you won’t actively trade bonds but instead buy individual bonds or funds relatively infrequently. With that being the case, the main traits necessary will center around your ability to gather data on your options and make prudent choices based on that information.

Other Possible Pros: Bonds offer a fixed return, are generally less risky than stocks, and come with a rating based on their risk level, so you have some idea of your investment’s potential downsides.

Other Possible Cons: Bonds usually offer less return than stocks and are riskier than savings accounts.

Money market fund

Description: Money market funds are fixed-income investment products comprised of debt securities like US Treasury bills or unsecured debts from corporations or banks.

Risk Level: Money market funds are considered relatively low-risk relative to other investment options.

Possible Return: Due to the low-risk level associated with these accounts it should be noted that the returns from money market funds tend to be conservative.

Initial Investment Size: Money market fund investments can start at $1,000, but the minimum investment may be much higher depending on the fund.

Liquidity: Money market funds are considered highly liquid.

Work Required: As with all investments, performing copious amounts of research is essential to understand what you’re embarking on.

Skillsets Needed: To succeed in investing in money market funds, you’ll need to perform a lot of analysis of the available options.

Other Possible Pros: Money market investing is generally considered a low-risk way to diversify a portfolio.

Other Possible Cons: Low returns and a lack of insurance for the invested amounts mean this type of investing is not the best option for many people.

Cash back on a debit or credit card

Description: Some debit or credit card issuers provide a specific percentage payment on your purchases as a cash-back reward.

Risk Level: The main risk is getting caught up in overspending because you’re too focused on the cash back you’ll receive, causing a net negative for your bottom line.

Possible Return: Most cards fall in the 1-2% range, though it’s important to understand that some cards change the amount of cash back you get based on the type of purchase.

Initial Investment Size: It’s often possible to find cash-back cards with no initial fee, though it’s important to ensure you understand the fee structure not only at the beginning of your time as a cardholder but on an ongoing basis.

Liquidity: Liquidity is a non-issue since no deposit is typically tied to cash rewards cards.

Work Required: Researching cash rewards cards isn’t too laborious. Talking with your financial institution is a good start.

Skillsets Needed: Money management abilities will go a long way toward ensuring your experience with a cash-back card is positive. Discipline is also crucial to avoid overspending merely to get more cash back.

Other Possible Pros: Cash-back cards can be an excellent tool for generating passive income because they pay you for doing something you were doing anyway: buying stuff. Debit and credit cards, in general, offer a great deal of ease of use and flexibility. Using a credit card has the added advantage of helping you build a positive credit score as long as you make payments on time, keep your balances relatively low and keep the card open long-term.

Other Possible Cons: If the ease and flexibility mentioned above cause you to overspend, you might be better off using cash.

Renting out a home, apartment, or room

Description: Tenants pay you to live in a property you own.

Risk Level: If you haven’t bought the property yet, there is always a certain amount of risk associated with purchasing such a large asset. For example, what if you buy a home only to later have it condemned? If you already own a property, there is a risk the tenants will cause extensive damage. However, millions of Americans own property and navigate these kinds of risks every day.

Possible Return: With so much diversity within this category, it’s impossible to put any average return to taking on tenants. However, as mentioned above, millions of Americans own rental properties, and there’s a reason why this option has been so attractive historically.

Initial Investment Size: Again, there is a broad range here, but keep in mind that buying a rental property usually takes a 15-25% down payment.

Liquidity: Real estate is considered an illiquid asset due to the difficulties in selling a property quickly.

Work Required: This is one of the types of passive income requiring the most work. From researching the real estate market to upkeep on the property to dealing with many annoying tasks, the time commitment should not be underestimated. It is possible to hire someone to help with a lot of the work once you have invested in a property but keep in mind the extent to which that will eat into your profits.

Skillsets Needed: Research abilities, analytical skills, resilience, and attention to detail will be helpful regardless of your rental situation.

Other Possible Pros: Buying a rental property can be an excellent long-term investment because it can continue to earn you and your family income for years or even decades. There can also be certain tax advantages to owning property.

Other Possible Cons: In addition to the factors mentioned above, fluctuations in the real estate market and the area in which you buy can significantly affect the value of your property. Unlike some more conservative investments, the risk can be far greater with owning real estate.

HomeStreet Bank does not provide tax, legal, or investing advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or investing advice. You should consult your own tax, legal, and financial advisor before engaging in any transaction.

 

9/19/23

 

 

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