Step 3 in My Super-Simple 4 Step Guide to Building Wealth is to invest your surplus cash into income-producing assets.
Essentially, you’re using your money to buy yourself more money.
When done correctly, this should;
- increase your income,
- leaving you with more surplus cash each month
- to invest into even more income-producing assets.
And with each revolution of the cycle, you get richer and richer.
But the question that’s almost always asked is, “what income-producing asset should I buy?”
Well, no fear, Roz is here!
(yes, I just said that out loud whilst giving my best superman impression)
Let’s start before this gets weird.
What is an income-producing asset?
In a nutshell, an income-producing asset is anything you buy that provides you with consistent and recurring revenue.
The most obvious example (and one of the more popular asset classes) is a rental property; you buy a house and then receive a regular income in the form of rent.
The difference between an incoming-producing asset over a regular asset is that you get regular income back from your investment. Therefore, your own home is not an income-producing asset because it does not pay you.
Examples of income-producing assets
To help give you an idea of what income-producing asset classes you could invest in, here are some of the more popular examples.
As explained above, you buy a property and you rent it out. This is known as your standard buy-to-let model.
However, this category also includes:
- Holiday lets (think Airbnb)
- Office lets
- Student lets
- HMO (houses of multiple occupancy, aka house shares)
- Renting out a car parking space
..but as already mentioned (and it’s worth repeating) your own home is not an incoming-producing asset.
If you are based in the UK and you are interested in investing in a property, a book that I would highly recommend you check out first is Property Investment for Beginners by Rob Dix. I’ll be doing a review on this book soon, so make sure you’re subscribed!
2. Stocks, shares, and bonds
These investments are not as risky as people think and I urge you to take a closer look at them.
Stocks and shares
Buying a stock or a share is the same as buying a percentage of a company. For example, if I buy a share of Apple, then I own a percentage of the company – a very tiny percentage, but still a percentage.
If the stock pays a dividend, this is the same as getting a percentage of the company’s profits.
Bonds are like a loan, from the investor to the borrower, to be paid back over a certain period of time.
The borrower can be a business, individual, or even the government! For example, if you invest in a government bond, you’re essentially lending the government money and they will make regular payments back to you until they have repaid with interest.
If you want to know more about investing in these asset classes, then check out How To Own The World by Andrew Craig. It’s a great book for beginners and is how I got started investing in the stock market.
3. Business/angel investment
This one is pretty self-explanatory; you can either invest your money into starting your own business or you can make an angel investment into another start-up in return for a percentage of ownership.
Regardless of your choice, the more you know about business, the greater your chances of success, so check out some of the books that I have reviewed in the business section and also some of the posts I’ve written on entrepreneurship.
4. Passive income streams
This is probably one of my favorites places to invests simply because, when done right, the returns can be astronomical!
A passive income stream is an income stream that is detached from your time. So, once you’ve created it, you get paid from it over and over again even though you’ve done no additional work.
An obvious example of a passive income stream is creating an ebook. Once you’ve finished it, you can sell that ebook over and over and over again.
Other examples include:
Creating one of these income streams still requires some work, after all, you don’t get nothing for nothing, but the great thing about passive income streams is that they are SCALABLE!
Related Read: The Truth About Passive Income
5. Peer-to-peer lending
Simply put, you lend money to individuals who will pay you back over time (hopefully).
It’s a fixed-term investment and providing that the individual keeps up with the payments, you know the rate of return since the interest on the payments is calculated and agreed beforehand.
You can partake in peer-to-peer lending via various online platforms.
Of course, those aren’t the only 5 income-producing assets you invest in, there are others, but the above are the main ones and should be enough to get you going.
For more, just have a Google!
What should you buy?
The asset(s) that you choose to invest in will depend on a number of factors, such as:
1. How much money do you have to invest?
This is the first question you’re going to need to ask yourself. Obviously, some investments are going to require more upfront capital than others.
But don’t worry if you don’t have much to invest! You can get started in stock and shares for as little as £25 per month!
2. How long do you plan to hold the investment for?
In order to leverage the power of compounding, you’re going to want to hold your investments for as long as possible.
However, some investments can be made successfully over shorter periods of time than others.
For example, peer-to-peer lending could be done over a 2-year period, angel investment over a 5-year period, and stocks and shares over a 10-year period.
Related Reads: The Magic of Compounding
3. How much time do you have to invest alongside the money?
This is an important consideration because your time has value too!
When choosing the best asset class to suit your needs, don’t forget to factor in the time cost. Some investments, such as a small business, are going to require more of your time than simply buying a few shares.
Related Read: The Trading of Time
4. How liquid do you need the investment to be?
Liquid means how quickly can you turn the asset back into cash.
For example, a stocks and shares investment is more liquid than a property investment. If you need cash, it’s much quicker and easier to sell your shares than it is to sell a property – especially one that has a tenant in on a 12-month lease!
Although you should have an emergency fund for surprise expenses, you may still prefer to keep the cash in your investments as liquid and as easy-accessible as possible.
5. How much tax will you have to pay?
Some investments carry bigger tax implications than others, and this will vary from country to country.
Here in the UK, for example, if you have £20,000 to invest per year, you can do so tax-free by placing that money into a Stocks & Shares ISA (Individual Savings Account). This means that all your dividends and capital gains will not be subject to tax.
However, if you place that £20,000 into a rental property, you can bet you’re going to pay tax!
6. How much risk are you willing to take?
All investments have a degree of risk, some more than others. Of course, it usually stands the higher the level of risk, the greater the possible return, but nothing is ever guaranteed!
As a general rule of thumb, the younger you are the more risk you should be able to handle because you have more years for your investments to level out.
The older you are the more risk-averse you should be; after all, you don’t want your investments to suddenly drop by 40% just before you need to withdraw for your retirement. You simply don’t have the time to wait for the market to bounce back.
That said, your risk appetite will be personal to you and your own financial situation.
With any investment you make, you need to take into consideration inflation.
Inflation is the rise in prices over a given time. In other words, the cost of everything goes up and the value of £1 goes down.
If you have £5000 and you want to “play it safe” you may decide to stuff that money under your mattress rather than take the “risk” investing it.
However, after several years, inflation will erode down the value of your money. You may still have £5000, but it will not have the same purchasing power.
For example, £5000 stuffed under the mattress in 2010 would be worth about £3900 today (2021). In other words, you just LOST £1100 by doing nothing!
The lesson here is that in order to grow your wealth, you must aim to grow your money at a quicker rate than inflation.
Over the last 10 years, inflation in the UK averaged 2.7% according to the inflation calculator on the Bank of England website. Therefore, whatever income-producing asset you choose to invest in, aim for a minimum return of around 5%.
(I, personally, like to aim for 10% since the S&P500 – the top 500 companies in the US, which you can invest in via an index fund – has averaged around 10% each year since the 1920s)
So, although investing may seem risky (and yes, there is risk involved) the riskiest move of all is to do nothing, because if you do nothing, you are guaranteed to get poorer.
You need money to make money
Rather than spending your monthly disposable income on material possessions and liabilities that are going to do nothing except cost you money, the savvy thing to do is to use your money to purchase more money.
You do that by investing in income-producing assets. This is how the rich keep getting richer.
What you choose to invest in will depend on your age, how much money you have to invest, your risk appetite, amongst other factors.
You don’t have to invest in just one asset class, you can diversify your investments and invest in multiple.
My advice is to research the area thoroughly before you go throwing your cash around. There are many books written on all of these subjects, and it’s worth reading a few of them before taking the plunge.
As with all investments, the value of your investments can go down and you may get back less than you invested or nothing at all. So, the more you can educate yourself in the area you choose to invest in, the more you can reduce the risk of his happening.
But as illustrated above, the riskiest move of all is to do nothing as your savings with always be worth less tomorrow than they are today, thanks to inflation.
P.S. I almost sound like I know what I’m talking about 😅
- How to Own the World by Andrew Craig
- The Richest Man in Babylon by George S. Clason
- How (& Why) To Detach Your Money From Your Time
- The Magic of Compounding