The old adage of spending money to make money applies if you’re getting started when it comes to creating a passive income. You may find that at the start of this journey you are spending a little more time and money upfront to get the stream flowing.
How much you can spare financially – and also in terms of time – will have an impact on which direction you choose when it comes to generating passive monthly income. Here are five places where you could invest your money to get a monthly income:
1. Stocks
Playing the stock market can either feel incredibly exciting or completely overwhelming. Whichever way you look at it, stocks can be one of the best monthly income investments you can make.
By investing in stocks, you become a shareholder of a company and are entitled to dividend payments (if they pay dividends). There’s a lot of ground to cover on the stock market and if you think it could be a passive income option that works for you, start with our guide to investing in the stock market.
Some of the golden rules for investing in stocks for monthly income can mean only investing in companies that have a track record of providing a good return, and checking to see if dividends from the company have been growing over time. Here are some pros and cons of investing in the stock market as a path to generating a monthly income:
Pros of investing in stocks
- Can be a reliable income stream
- Provides some insulation from the stock market
- It can be a long term way to generate income
Cons of investing in stocks
- Share prices can drop
- Tax rates on dividend stock can rise
- There’s less appreciation than with growth stocks
2. Bonds
Bonds can be a safer investment than stocks. This makes them a lower risk investment – but like all investments, there is a modicum of risk to take into consideration.
Simply put, a bond is a kind of loan, and you are the lender. Instead of loaning money from a bank, a company (or the government) will loan from investors who buy its bonds in return for capital.
The company or government then pays interest back regularly until your bond matures. Here are a few pros and cons to know about bonds so you can decide if they could work as a way to earn a monthly income:
Pros of investing in bonds
- You can receive income through interest payments
- If you keep your bond until it matures, you get all your investment back
- You could even profit from your bond if you sell it at a higher rate than you purchased it for
Cons of investing in bonds
- Bonds don’t tend to earn you as much money as stocks
- Your bond yields can fall
- Companies can default
3. ETFs
Exchange-traded funds (ETFs) are another option to consider when it comes to the best monthly income investments. ETFs combine the benefits of stocks, bonds and mutual funds, but offer you a way to invest in a wider range and incur lower expense ratios. They can also be bought or sold at any time of the day.
Pros of investing in ETFs
- Easy to diversify a portfolio
- Helps to mitigate risk of investment
- Lower expense ratios
Cons of investing in ETFs
- Risks associated to fluctuation
- Value may not represent true movement of the index
- Some knowledge is needed
4. Buy-to-let
Investing in property is considered one of the best ways to secure a passive monthly income stream.
Of course, this method does take quite a chunk of upfront financial investment and time, but you do get the added bonus of having an asset at the end of the day.
When you buy to let, you are specifically purchasing a property to be rented out. You can also use the rent you get to pay down your mortgage. While it may sound like a win-win solution, there have been changes in the taxes associated with buy-to-let properties which should be taken into consideration when deciding if it’s the right choice for you.
Pros of investing in property
- Can provide a steady monthly income stream
- Rent price can fluctuate with inflation, meaning no diminishing returns
- Considered to be a safer form of investing
Cons of investing in property
- Can affect your taxes as landlords are liable for income tax, stamp duty and capital gains tax
- You will be responsible for the property financially if repairs and emergencies arise
- Tenants can be stressful!
5. Savings Accounts
While it may not sound as exciting as playing the stock market or buying a property, a high yield savings account is actually one of the most stress-free options for generating a monthly income.
You don’t come up against any potential losses, your money stays safe and you don’t need to make any major investments to get to this point. You can open a savings account with a competitive rate of interest, and simply leave your money stashed in the account to grow. Over time, any interest earned will all add up to passive monthly income.
Pros of investing in a savings account
- A risk-free option for generating interest
- A reliable way of getting your money working
- You still have access to your money
Cons of investing in a savings account
- May have to deposit a lot of cash to see a good return
- Takes time and patience
- Can be a set back if you need to withdraw
One of the best savings accounts for earning a competitive interest rate are fixed rate bonds. While you won’t earn a monthly income, you’ll get your return when your bond matures. That depends on the length of your term, which is typically between six months and five years. Your savings will be safe and growing, but you won’t have access so this is something you need to consider.
Pros of investing in fixed rate bonds
- No risk, as you get all your money back plus interest at the end of the term
- You’ll know exactly how much interest you’ll earn
- You can choose which length of time works for you
Cons of investing in fixed rate bonds
- You won’t be able to access your funds during the term
- Interest rates are locked (which can be a pro or a con)
- Rates may not be as favourable as other forms of investment, such as stocks
Creating passive income that works for you means knowing your financial goals. How much time and investment you have at the beginning of the journey will determine which methods work best for you. If you want a low risk set up, investing in savings accounts can be a more secure solution.
