Smart Things To Know When Investing For Monthly Income

Today’s article is a guide to income investing. If your goal is to develop an income investing strategy for earning monthly passive income, you have come to the right place.

First, I’m going to share with you some important information about investing for income now. That every income investor should understand.

Then, a 5 step plan. So you will know how to invest for income when we are done.

Let’s jump right in…

Income Investing: 5 Steps For Making Money Every Month

For an overview, let me share the 5 steps to a successful investing for income strategy.

  1. Identify income-generating investments
  2. Select income investments that meet your goals
  3. Add fresh funds to your income investments regularly
  4. Reinvest all income received back into your portfolio
  5. Use advanced strategies to maximize investment income

We will go through each of these steps in detail. But first, l want to discuss some important background information. About investing for monthly income.

Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.

What Is Income Investing?

My income investing definition has 3 parts.

First of all, investing for income is 1 of several types of investment strategies. For example, income vs growth investing.

Furthermore, the primary objective of an income investing strategy is to generate a constant stream of income. From an investment portfolio.

Finally, the income is paid to the owner of that portfolio in the form of interest, dividends, or rents.

How An Income Investing Strategy Works

An income investing strategy involves buying income-producing assets. The goal is to generate the highest possible cash flow from an income investing portfolio. That is consistent with an investor’s risk tolerance.

Why Choose An Income Investing Strategy

People like you and I choose an income investing strategy for 1 main reason.  That reason being the regular monthly passive income it provides.

Furthermore, income investing for retirement is a popular use of the strategy. For example, the income can be used to supplement other forms of traditional retirement income.

Or, be put to work as part of building multiple income streams. To support a lifestyle of financial independence.

Now that we have covered the what, how, and why’s about investing for monthly income. Let’s go through each of the 5 steps in detail. Then you will know exactly how to invest for income.

1. Identify Income-Generating Investments

The first step is to identify income-producing investments. There are many types of these assets to buy.  Here are several income investing ideas for your consideration:

Best Investments For Income: Interest-Bearing Accounts

certificate of deposit (CD) is a savings certificate with a fixed maturity date and specified interest rate.  Most CDs have minimum investment requirements.

Savings accounts have some similar characteristics to CDs.  However, unlike CDs, they have no minimum holding period.

US savings bonds are low-risk savings products that pay interest for up to 30 years.  Savings bonds are issued by and backed by the credit standing of the US government.

Money market accounts are another type of savings product.  They are comprised of very short term, high-quality investment securities.

You can find income assets like this online. CIT Bank is a good choice.

Best Investments For Income: Bonds and Loans

Loans and bonds are good sources of income. They come from a variety of borrowers.

State and local governments borrow money by issuing municipal bonds to fund their operations.  For-profit companies issue corporate bonds to borrow money from investors.

Peer-to-peer (P2P) loans allow individuals to obtain loans directly from other people.  Thus, the P2P lending process cuts out traditional financial institutions as the middleman.

Best Investments For Income: Stocks

Dividend-paying common stocks provide the investor with partial ownership in a company that pays dividends. They are also referred to as dividend growth stocks.

use the Simply Investing Report to identify high-quality dividend stocks to invest in.

Preferred stocks are hybrid securities that have a mix of bond and common stock characteristics.  An investor forgoes the upside potential of common stock. But is normally compensated with higher investment income.

Real estate investment trusts (REITs) refer to companies that own, finance or manage income-producing real estate.  REITs issue common stock to the public that pays a dividend.

Master limited partnerships (MLPs) are a business venture that exists in the form of a publicly traded limited partnership.  Like REITs, MLPs issue common stock that pays a dividend.

Of the stock choices mentioned above. Dividend stocks are my clear favorite. You can learn how dividend stocks work in this article.

Best Investments For Income: ETFs And Mutual Funds

There are open-end mutual funds, closed-end mutual funds, and exchange-traded funds that have different characteristics.  On the other hand, they are all similar in that they are a collection of securities.

Funds offer an investor immediate diversification across an asset class.  Or, diversification across multiple asset classes.

In particular, bond and stock investments can easily be made through funds. Rather than purchasing individual securities.

Best Investments For Income: Real Estate

Finally, consider real estate. I already mentioned REITs. But there are other ways to generate portfolio income from real estate assets.

You can invest in a physical asset like rental properties. But that can be a lot of work finding tenants. And maintaining the property.

So, also consider online real estate investment platforms. That connects investors to borrowers who need help financing a variety of real estate projects.

To summarize, here are the main types of assets you will want to consider for your income investing portfolio. Think of them as broad asset categories. Also called asset classifications.

  • Interest-bearing accounts
  • Bonds and loans
  • Stocks
  • ETFs and mutual funds
  • Real estate

Need more income investing ideas? This article will guide you through everything you need to know about different types of income-producing assets.

So, you are familiar with the types of income investments to be on the lookout for. Next, in step 2, you must choose the right income investments for your situation.

2. Select Income Investments That Meet Your Goals

If you are like me, you want as much income as possible from each of your income investments. But it’s not that easy.

Why? Because higher-income investments come with greater investment risk. Meaning the potential for losing part or all of your original investment.

So, you need to determine your risk tolerance. Ask yourself how much risk you are willing to take. Risk, meaning loss of part or all of your initial investment. In return for higher-income on that investment.

Only you can determine your risk tolerance. And it may change over time.

How do you manage your risk tolerance?  Let me explain…

Asset Allocation & An Income Investing Portfolio

You match your risk tolerance with the right income investments. And do this through smart asset allocation.

Asset allocation involves dividing an income investing portfolio among the different asset categories we just discussed.

High-Income Investing

Do you have a high-risk tolerance? Then high-income investing is a possibility.

Select higher-income investments. For example, high yield bonds, P2P loans, preferred stocks, high dividend stocks, and REITs.

Low Income Investing

On the other hand, you may have a low-risk tolerance. In this case, a low-income investing portfolio might be your best option.

Consider building your income investing portfolio with interest-bearing accounts; investment-grade bonds; and high-quality dividend growth stocks.

Strike The Right Balance In Your Income Investing Portfolio

Finally, it’s not an “either-or” proposition. High-income investing or low income investing.

Because most income investors strike a balance. Meaning they have a mix of higher-income, higher-risk assets. And lower-income, lower-risk assets in their income investing portfolio.

Okay. So you know what types of assets are income investments. And you have a thought process for choosing the right income investments. That is consistent with your risk tolerance.

Let’s move onto step 3…

3. Add Fresh Funds To Your Income Investing Portfolio Regularly

Step 3 in our guide about how to invest for income may be the toughest of them all.  Why is that?

Because you have to have excess cash to start your income investing portfolio. And the more cash the better. At least in the early days and early years of getting started.

So, your biggest personal finance challenge may be to make more money.  Also, spending less than you make.

That simple equation creates excess cash to feed your income investing portfolio.  In other words, you have to create excess cash to make the investments of your choosing.

Here are some thoughts on how to go about it…

Make More Money To Accelerate Your Income Portfolio Strategy

How do you earn more money?  You do so by:

  • Investing in yourself
  • Improving your skills
  • Creating more value in your business, or for potential employers

Here’s a resource to improve your resume and find a better paying job.

Also, spend some time working a side hustle.  That can bring in some extra cash too.

I use Survey Junkie to make a little side money. Taking consumer surveys for cash. Sign up for Survey Junkie here.

Save More Money When Building An Income Investing Portfolio

I know.  It’s no fun to scrimp and save money.   But, spending less than you make is the second part of the earn more than you spend challenge. So, I have a few tips on saving money for you

Consider how you can reduce your costs. Think about your spending on these 4 big-ticket items and look to cut your costs in these areas wherever it makes sense.

  1. Housing
  2. Transportation
  3. Food and Beverage
  4. Leisure activities

Sharpen your pencil and go through your budget with a fine-tooth comb.  When you achieve success with your investing for income strategy, you will be glad you did.

Tools & Resources For Saving Money

Not sure where to start?  Here are a couple of suggestions that work for us.

We save on just about all everyday online purchases using Rakuten.  Also, Rakuten gives you $10 just for signing up and using their app.

Keep investment costs low. I use the Webull app to buy and sell dividend stocks for free. And for a limited time, Webull is offering free stock on new accounts.

For an additional option, consider M1 Finance. They offer a set of excellent free financial tools and accounts for investing and managing your cash.

And finally, I pull all of my finances together using Personal Capital.  It allows me to see all expenses and investments in 1 place.

There is no need to keep track of multiple websites, credit cards, debit cards, and passwords. Best of all, Personal Capital is free to sign up and use.

So create as much excess cash flow that you can. And feed it into your income-generating investments. That makes up the income investing portfolio that you have been building.

Given time, your investments will start to through off the income you desire. And that leads me to step 4. What to do with that income…

4. Reinvest All Income Received Back Into Your Portfolio

Put the effect of compound interest work for you. Don’t be tempted to spend the money your income portfolio is generating.

So, reinvest all income back into the investment types of your choosing. This will accelerate your pace to achieving your goal.

And there are 2 ways to go about reinvesting portfolio income.

Automatic Reinvestment

First of all, you can automate reinvesting portfolio income.  Instruct your brokerage firms, mutual fund companies, and banks to automatically reinvest the income paid by each investment. Right back into that same asset.

The advantage of automated reinvestment is that once you set it up, you can forget it.  And your income is put back to work in your income investments right away.

On the other hand, investment decisions are taken out of your control.   You may automatically reinvest in an asset that no longer meets your risk tolerance.

And higher-income, higher-risk assets will receive the bulk of the reinvested money. Because they pay more income.

Further, automatic reinvestment may throw your asset allocation out of whack. Leaving you an income portfolio that no longer meets your risk tolerance.

Lump-Sum Manual Income Reinvestment

The second option is to let your investment income accumulate in cash.  Then, put that money into the income investments of your choosing, lump-sum.

You can use the income generated from the portfolio. And the new funds you are investing from your excess cash flow. Then, identify the best investments to make at that time. Finally, rebalance your holdings with this money to keep your asset allocation on target.

For these reasons, I think lump-sum reinvestment is the better choice.

When To Stop Reinvesting Your Investment Income

Finally, when you achieve the goal of passive investing income. You have the option to stop reinvesting. And use the money as best you see fit.

As I said earlier, to supplement other retirement income streams. Or, pursue a lifestyle of financial independence.

Those choices are yours.  Once you have achieved your goal!

And that’s what an investing for income strategy is all about. Building a passive investment income stream. To pay your bills. And allow for choices on how to spend your time.

But there’s more. One last step in the how to invest for income 5 step guide.

That being advanced income investing strategies. Let’s do it. And then, I will wrap up.

5. Use Advanced Strategies To Maximize Investment Income

So, you know what types of investments to look for. And understand to select the ones that meet your risk tolerance. And asset allocation plan.

Furthermore, you are adding fresh funds to your income investing portfolio regularly. And reinvesting all income received.

Your portfolio is growing. And you are more comfortable with the entire process.

You see what you are doing will achieve your goal of income investing for retirement. Or, financial independence.

But you want more. More what? More income, of course. Who doesn’t?

So, here are some more advanced investment tips to increase your investment income. Just don’t forget about risk tolerance and asset allocation as you consider these options.

Opt for Investments With Higher Interest Rates Or Yields

Choose high-income investments. Yes. Higher-income investments have more risk.

But once you have created a larger diversified income investing portfolio. It is easier to hold a few higher-risk investments.

Many income-generating assets are risky when held by themselves. But, as part of a diversified portfolio, that risk is countered with diversification.

Invest In Dividend Growth Stocks

Dividend growth stocks are stocks of companies that increase their dividend payments regularly.  This is one of the most passive ways to increase portfolio income.

Just hold a dividend growth stock for the long term.  And the company will increase its dividend payments every year.

The income from your investment portfolio will now increase for 3 reasons:

  • Investment of new funds
  • Reinvestment of income received
  • Organic dividend growth

This is what creating an income snowball is all about.

Change The Mix Of Income Investment Holdings

Sell lower-income assets from your portfolio. Then, invest the proceeds in some of the higher investment income examples.

Selling may generate capital gains, 1 type of income from investments. More on capital gains next…

Strategically Sell Holdings From The Income Portfolio

The strict definition of portfolio income includes capital gains.  So, create income by selling income portfolio assets periodically.

Sometimes this is referred to as creating homemade dividends. And it can be done because many income investments are also considered appreciating assets.

Reduce Taxes On Income Investments

Reducing taxes depends on your tax situation.  It is hard to give specific guidance.

But, every dollar of tax you save increases the after-tax portfolio income you keep for yourself. So, it is important to know that some forms of portfolio income receive preferential tax treatment.

Specifically, dividends and long-term capital gains from the sale of investments are taxed at lower rates. Versus investment income from interest-bearing accounts, bonds, loans, and some preferred stocks.

Income Investing For Retirement

Investing in qualified retirement accounts is another way to minimize taxes.  In the US, qualified accounts include the 401(k), 403(b), Roth IRA, and regular IRA.

Depending on the type of account, taxes are either deferred or never due. Have you been meaning to open and fund an IRA?

An IRA is a great place to put your income investments. And M1 Finance is a great place to open an online IRA account.

Keep Income Investing Portfolio Turnover Low

Portfolio turnover means how often you buy and sell your portfolio income assets.  But a certain amount of selling is necessary for rebalancing or realizing capital gains for income.

On the other hand, buy and sell too much and you are more likely to increase taxes and increase transaction costs.  The more taxes and transaction costs you incur, the less investment portfolio income that remains for you.

Reduce Investment Fees

Investment fees are another area that can take a bite out of your portfolio income.  Mutual fund and exchange-traded fund (ETF) fees are taken off the top of any income that they produce.   Therefore, fees reduce the cash that ends up in your pocket.

Thus, invest in low-cost ETFs.  And use a discount brokerage that offers zero-commission stock trades. As I mentioned before, I use Webull to buy and sell stocks for free.

Avoid Over-Paying For Portfolio Income Investments

The income from many portfolio income assets is inversely related to the price you may.  Higher prices, mean less investment income.

Look for value.  Dollar-cost average into stock and bond investments.  Avoid buying overvalued stocks.

Write Options To Increase Investment Income

Finally, an investor can increase portfolio income by writing call options against their stock holdings.  This is very advanced. But can be effective if you know what you are doing.

Of all the aspects of investing for income strategy discussed today. Using options is the only one I have never tried. So, I can’t recommend it based on my experience.

That concludes our discussion of several good ways to increase portfolio income. It’s time to wrap this up. Let’s do so with a summary of what we covered.

Income Investing Wrap Up & Summar

Income investing is 1 of several different investment strategies. For example, income investing vs growth investing.

An investing for income strategy involves buying income-producing assets. Then, combining them in an income investment portfolio. That produces passive income for its owner.

You can implement an income investing strategy by following these 5 steps:

  1. Identify income-generating investments
  2. Select income investments that meet your goals
  3. Add fresh funds to your income investments regularly
  4. Reinvest all income received back into your portfolio
  5. Use advanced strategies to maximize investment income

That concludes today’s article. It’s time to start investing!

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