The secret to financial freedom lies not in working for money, but in making your money work for you. Not utilizing your money to maximize your wealth is a lost opportunity. This is a big mistake that many people commit. This is what sets them apart from the rich. Having a wealthy mindset is necessary to get financial freedom.
And this can only be achieved by investing in assets that generate income. By investing in income-producing assets, you can earn money without having to actively work for it. But first, let’s understand what exactly income-producing assets are!
What are Income-Producing Assets?
A financial asset is anything that you own/purchase, which gives benefit over a long period of time. Adding to this, income-producing assets are those assets that generate income for you in the future. They act as a passive source of income and help you multiply your wealth.
Investing in a diverse range of such assets can help you generate higher returns at a lower risk. A diversified portfolio is essential for successful investing. So if one investment fails, you can recover your losses from other assets. Let us look at the top 8 income-producing assets to build your wealth.
1. Business
Investing in a business – be it online or offline – is one of the most popular and profitable ways to invest and maximize your wealth. Though businesses require a lot of work upfront, the earning potential in this segment is unprecedented.
Most billionaires and millionaires earn their wealth via businesses only. However, there are also some downsides and factors to consider while starting a business. Businesses usually require a high financial commitment from the owner. On top of that, there are many business risks that may affect your venture, which you cannot account for beforehand.
Alternatively, you can go for either a traditional offline business or an online business. You can set up online businesses as a side hustle. And once it is up and running, you might not have to monitor it consistently. Moreover, the capital requirements in an online business are lesser, and it can also have a higher profit margin. However, it is important to note that actual capital requirements and profit margins may vary. Such factors actually depend on the nature of business, and the industry you operate in.
2. Real Estate
There is no shortcut to making wealth or get-rich-fast method in real estate. However, real estate is an investment alternative that has relatively low risk with minimal barriers to entry. 90% of the millionaires accumulate their wealth by way of real estate investment. But what is to be noted is that most of them were far from rich when they started.
One of the major benefits of real estate investing is that there is never any shortage of demand in this sector. Everyone requires a place to live, and with the population rising consistently, it is assumed that this demand is not going to vanish for quite a while. Secondly, there is no need for marketing, and even if there is the marketing cost is very minimal.
Appreciation of real estate investments is what enables investors to make the biggest money in this sector. Though real estate generates a steady cash flow in the short run, appreciation or the increase in the value of assets over time is the long game. The annual average appreciation rate in India is 3.6%. So, if you purchase a property for Rs 40 lakh, and it appreciates even by 3%, the property would be worth Rs 41.2 lakh. This appreciation in the value of the asset will not only cover any mortgage that you may have taken to finance the asset but also leave some profit in the hands of the investor.
3. Stocks
Often individuals hesitate from investing in the stock market thinking that stock investing is very risky and time-consuming. However, nowadays investing in stocks has become quite easy. This has become possible because of evolving technology and development in the stock market. Investors can buy and sell stocks with the click of a button, and learn about which stocks are the best performing in the market. Stocks offer portfolio diversification and liquidity and also generate dividend income. Moreover, stock market investments prove to be a great hedge against the rising inflation in the economy.
Historic data has shown that in the long run, stock market returns have always been very generous. Patience is the key to stock market investing. Though individual stock prices fluctuate on a daily basis, in the long run, investors most definitely see their money compound and grow. However, it is to be noted that stocks should be picked only after careful consideration and due diligence. This leads to minimum risk and maximum returns.
Another way of investing in stock markets for those who lack the time and skills to pick a good stock is investing in mutual funds. Mutual funds are baskets of securities offered by Asset Management Companies. Reputed fund managers head these mutual funds. And they only select the stocks after in-depth consideration and analysis.
4. Bonds and CD’s
Unlike stock market investments, Bonds and Certificates of Deposits (CDs) are debt-based instruments. They possess a lower level of risk. These instruments are a good investment for risk-averse investors and those who wish to safeguard their capital. In exchange for sacrificing high returns, such investors settle for moderate to low returns. Bonds and CDs provide fixed returns and are reliable, income-producing assets.
Bonds pay interests based on a coupon rate. They are basically a loan that investors provide to the government or a company. In exchange, the borrower has to pay back the principal to the investor along with a certain amount of interest at a specific point in time. The time range can stretch several years. Hence, bonds can be classified as long-term investments.
Certificates of deposits, on the other hand, are a time deposit account. These accounts can be easily opened with banks for as short as one month. Banks pay interest on the CD account. The interest provided is affected by the amount deposited in the CD and the interest rate it is offering. Usually, CDs with longer terms carry higher interest rates than those with shorter terms.
Another thing to note is that CDs are a comparatively safe investment choice, as compared to bonds. Though bonds may be slightly riskier, they offer higher returns.
5. Commodities
Apart from traditional investing avenues, commodities can also be a great wealth-generating asset for an investor’s portfolio. Commodity investing offers great diversification amongst various types of commodities. They also act as a hedge against inflation and earn high returns. There are various methods for investing in commodities. For example, purchasing physical commodities, investing in commodity stocks, investing in commodity futures markets, commodity ETFs or mutual funds based on commodity stocks.
In India, we have 3 main categories of commodities – agriculture, metals, and energy. Some of the highest trading commodities in India are crude oil, gold and copper. Other commodities to invest in can be silver, aluminium, natural gas, soybean, jeera and coriander. Commodity investments tend to have more liquidity, as a result of the seasonality and unpredictability in their prices.
6. Savings Account
A savings account is a bank deposits account that bears a fixed rate of interest. Most individuals already have a savings bank account; however, this asset is also essential to build wealth. There might be a situation or an opportunity where you may require funds urgently. And if all your funds are tied up in various assets, you may end up with no cash available at your disposal.
Though the return earned on funds kept in a savings account is lower than what one can earn from other wealth-generating assets, it is also crucial to park a certain proportion of wealth in these accounts. The Reserve Bank of India (RBI) has strict measures in place to ensure the safety of money in a savings account. The range of interest earned from a savings account is between 4-7%, depending upon the chosen bank. This rate might be a bit low, however, a savings account offers ample liquidity to the account holder. You will have complete access to your money and make deposits and withdrawals whenever you like.
Additionally, if you may want to secure a bank loan in the future, it might be easier if you already have existing savings account with the bank. This is because you already have a history with the bank.
7. Intellectual Properties
Intellectual property refers to something that an individual creates from their minds. These can be inventions, artistic/literary works, designs, symbols, and names and images used in business. These properties are protected by copyrights, patents, trademarks, etc. Furthermore, creators can earn a royalty or fee on their properties if someone else uses their creations.
IPs are intangible assets. They are bought and sold just like ordinary assets. However, they are not very liquid.
For example, you write a book and have its copyrights. Then on each sale of the book, you will earn a royalty till the time the book is in print. Usually, it is seen that businesses have such IPs to protect their inventions, trade secrets, product designs, company name, etc. This is so that no one else copies off their creations and they have exclusive rights to them. Or if someone does use their creation, they pay them a fee.
Another example of IPs in real life is very much evident in Disney’s case. Disney owns acquired copyrights, patents and trademarks. These IPs protect their unique scripts, characters, TV shows, movies and animation styles. They are also worth millions of dollars. This restricts the use of its character names and images by others.
8. Content
In this digital era, where everyone is consuming content and information left and right, there is immense scope in creating your own content and monetizing it to create a passive income source. This can be in the form of blogs, websites, videos, etc. Nowadays we see so many makeup influencers, personal finance influencers, etc. They post video content on various social media platforms. Once they gain a substantial number of followers, they can start earning through their content. And what’s more, is that they can collaborate with brands and other influencers.
In Conclusion
Allocating your income towards the above-mentioned assets can contribute to creating wealth in the long run. In addition, you can generate a steady stream of passive income periodically. This would be over and above your active source of income. These income-producing assets also enable you to diversify your portfolio and accordingly, minimize risk and maximize returns.
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