Q: What should I consider before building a passive income stream?
Passive income is an attractive notion, to say the least—and it can be a valuable tool in building financial security. The word “passive” implies minimal time and effort in locking down and maintaining a steady income. What’s not to like?
But there are some important considerations before jumping in—and not all sources of passive income are created equal. For example, certain strategies may require a greater financial outlay than others, as well as ongoing monitoring or working with a professional to guarantee income generation.
To start, it’s important to understand your risk tolerance. Basically, that’s how much volatility in the value of your investments you can withstand.
If you’re pretty risk averse, the right passive income strategy may be stashing your money in a high-yield savings account. This is a painless process that rewards you with a guaranteed growth rate. But in exchange for that security, you may only earn about 1 percent on your money (whereas investing in dividend-yield stocks or even bonds can generate much more in passive income).
On the other end of the spectrum, investing in real estate can create a sizable passive income. However, owning a rental property can require a level of effort that doesn’t work for everyone. Plus, not all real estate investments can generate returns, so it’s necessary to be able to accurately analyze potential opportunities. The people best suited to pursue this income source are those who are comfortable with the risks and have the time and skills to do their research—and, of course, the funds necessary to make the initial investment.
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