Things to Consider When Deciding to Create Passive Income
Passive income is the goal of the majority of investors. Put simply, this kind of income is generated whether you’re at the office, or sitting on a beach in Cancun. Real estate income, stock dividends, and royalties from creative works are just a few examples.
There are 4 things you should examine before you decide to add a passive income stream to your portfolio:
Below, we’ll examine each of these things in detail.
When you begin any type of income generating gig, you should always make safety your #1 priority. When you own an asset that should be making money for you, you should make sure that your financial information stays secure so you don’t make a routine check of your bank account and find that the money you expected to be there is missing.
You want to make sure that your passive income stream is generating growth. A good investment becomes great when it increases in value faster than inflation. For example, if you had purchased shares of the Coca-Cola Company in the 70’s, and NOT reinvested your dividends, annual dividends would continue to be higher than when you originally began cashing out. This is because Coca-Cola has grown as a business, and profits have skyrocketed, meaning that shareholders receive a larger cut.
The main idea with diversification is that if you only have one asset, such as a stock, and you put all of your money into that stock, if it fails, you’ve lost everything. However, if you divide your money equally between several stocks, if one stock fails, you still have the others to keep you afloat. The more investments you can make, the better, even if the amount they generate is lower. If you can have 100 investments that each generates $1,000 per year, that’s better than only having 1 investment that generates $100,000 because if you lose one investment out of 100, you’ll still generate 90k, but if you lose your only investment, you’ve lost everything.
Taxes vary, depending on what type of income you have. Focusing only on the money that is earned is sure to get you into a heap of trouble come tax time. Instead, you should focus on how much is left after all taxes have been paid. While dividends have a tax rate of around 15%, there are some types of income that can be taxed as high as 41%! Making things more complicated, certain types of assets, such as particular retirement accounts, aren’t taxed until you withdraw the money, and can even have higher taxes for withdrawing early! Typically, the highest tax rates are the worst case, but it should be a factor you consider when deciding which kind of investments to make.
Remember, when considering your investments, it is important to calculate net income, which is the income left after taxes are taken out. You living situation can be benefitted positively by positioning your assets. This is a technique in which you shift your assets to different types of accounts yearly, in order to minimize the tax implications. It’s a bit of extra work, but only needs to be done once per year, and could potentially save you thousands of dollars.
And, speaking of that yearly work, it’s important to audit your portfolio once per year or more. It’s smart to set a date that you stick to every year – for instance November 12 – and look at each of your assets, analyzing them and making sure they are still providing a good balance of the 4 things above.