Welcome to the World of Income Investing

 

Yes, You Can Be a Successful Income Investor by Ben Stein and Phil DeMuth is a great introduction to income investing. This book covers the basics income investments available to investors which include:

• Bonds
• Stocks
• Preferred Stocks
• Real Estate Investment Trusts (REITS)
• and Annuities

Armed with this knowledge you can start to build your own income producing portfolio. One of my goals is to completely replace my earned income with passive (portfolio) income. I've estimated that in order to do that I'll need a portfolio worth approximately $800,000. Although this sounds like a lot, reaching this goal will become easier as the portfolio grows. This is because the income the portfolio produces grows as the portfolio grows, accelerating its growth (given that you reinvest all the income that your portfolio produces).

One important thing to note is that as your income portfolio grows you should be investing in lower risk income options, such as bonds. My recommendation would be to invest aggressively at first, when your portfolio is relatively small, then over time as your portfolio grows invest into safer, lower yield investments. As you're closer to reaching your goal it will be more about capital preservation than growth.

Here's some advice from Ben Stein:

Rich Dad Lesson: 3 Types of Income

Like I promised here is another lesson from the book Rich Dad Poor Dad by Robert Kiyosaki. Robert explains that he is often approached by reporters for interviews, where he is asked what he does for a living and how much he gets paid. He usually tells the reporter that he makes a small salary from working at his company (compared with Fortune 500 CEO's), and that's usually where the interview ends. What most reporters fail to ask Robert is if he has other sources of income. Robert is rarely asked what kind of business he is in, what investments he has made and if he has other sources of income.

In Kiyosaki's book he explains that there are three types of income. There is active income, passive income and portfolio income.

1) Active income comes from your full-time job where you work 9-5. Active income typically comes from exchanging your time for a salary or wage.

2)Passive income is the opposite of active income. This is where you receive cash flow without actively putting in long hours. Passive income comes from what Robert defines as an "asset" (see article http://reynold-savemoney.blogspot.com/2010/07/rich-dad-poor-dad-whats-asset.html ). In this case it can be something like owning rental property, where tennants pay you rent on a monthly basis.

3) Finally, there is portfolio income which comes in the form of stocks and bonds. When you own these types of investments you receive cash flow in the form of dividends, distributions and coupons.

Reporters often fail to ask what are Robert's passive income streams, they are only interested in his active income or how much he earns at the job he works. They fail to notice that he owns apartments, stocks, bonds and patents. He has published various books that he continues to receive royalties for. He owns patents on board games that he invented to help people learn about personal finances. These patents provide Robert with a constant flow of cash.

We learn from a young age that we should go to school, get good grades, so that we can get a high paying job. We are told to strive to become doctors or lawyers. Doctors and lawyers make a great salary, however they have to put in their time and expertise to earn their salary. These professionals are limited in their earnings by the amount of hours they can work in a day. So, it's important to understand the other forms of income, such as passive and portfolio income if your goal is financial freedom!