With the Coronavirus outbreaks surging (and our salaries at risk), we all need to learn about how to replace some or all of our income with cash flow from investing activities.
Adding income from passive investments can help you to create multiple flows of income so that you’re not reliant on one company or client.
Without a doubt, diversified streams of income are key to weathering any economic crisis.
Before we dive in, let’s explore the differences, and risks, between speculating and investing. This will position you to make wise financial investments.
Cash Flow from Investing Activities
Over the years, the term ‘investment’ has become widely thrown about.
It’s meaning has been co-opted to describe everything from putting your money into a hail Mary, high-risk cryptocurrency to a long term investment in real estate.
However, there’s a big difference between investment and speculation.
Investments, in the truest sense of the term, provide you with long-term cash flow from investment activities.
With investing, you deploy money to get more money back later on from the asset. Not by selling it to someone else, but by what the asset itself will produce.
If you are an investor, you are looking at how the asset is going to perform. Meaning, how much money will it consistently kick off relative to how much time or energy it requires?
In contrast, when you speculate, you primarily focus on what the price of the object is going to do independent of the asset performance. Speculating is fun and exciting, but rarely involves cash flow payments.
Rather, it depends on the underlying asset that you own going up (or in some cases, down) in value.
Why Investing is The Holy Grail of Wealth Creation
What’s the problem with relying on speculation as a wealth creation approach?
Put simply, I like my money to be allocated such that my investments produce cash flow to fund my lifestyle, regardless of whether they go up or down in value.
This approach creates financial freedom, no matter what age you’re at.
By now, you’re probably thinking, “Ok, that sounds great, but how do I possibly replace my salary with cash flow from investment activities?”
The answer is simple: In small steps.
First, you need to understand the difference between investing and speculating, which you now do.
Next, you’ll need to start stacking cash flow from investment activities in increments, aiming to achieve $100 per month first. Then $200 per month. Then $500 per month. And so on.
Now that you understand that cash flow from investment activities comes from identifying and owning cash flowing producing assets, let’s explore what speculating is.
Let’s also dive into why it appeals to certain types of people.
What is Speculating?
Speculation is a high risk/high reward way of making money.
It usually involves buying an asset (e.g. product, company, stock) in the hopes of making a large profit from selling it when the market conditions are favorable.
Speculators generally have knowledge of the markets and a good instinct for predicting which way they will turn. But, it is essentially a gamble.
For example, if the markets are currently going through a period of growth, then speculators can bet against the market and make a considerable amount of money on the downturn. However, if the markets don’t fall far enough or fast enough, then they can lose a great deal of money.
Though generally not considered a good, long term investment strategy, speculators do put a lot of much-needed liquidity into the market.
Most often, people get attracted to speculative investments because they are exciting, fun, and if they go the right direction, can create a “score.”
Obviously, the problem is that they can also fall in value, which loses you money and sets you back financially.
Speculating also won’t help you with your monthly living expenses – that is, unless you get lucky and sell for a big profit. Even then, you’d be personally responsible for distributing your winnings over time to help with your ongoing costs of life.
Types of Speculative Investments
If you’re looking to invest in speculative investments, examples of these include:
● Future Contracts: The commitment to buy an asset at an agreed price at a certain point in the future. The buyer then agrees to buy the asset once the contract time expires. These types of contracts are usually involve trading commodities and are traded on the exchanges.
● Short Selling: Speculators predict that the price of a stock will drop in the future and takes an appropriate position to benefit from this.
● Put and Call Options: In a put option, the contract owner has the right to sell a security at an agreed price at a specific time. A call option allows the contract owner to buy at a specified price at a specified time.
● Start-up: 80 percent of start-ups fail. For every successful startup you read about, there are hundreds more that did not last. Due to this, investing in these companies is a much riskier proposition than buying shares in a more established company.
● Cryptocurrencies: Digital currencies such as Bitcoin, experienced a huge surge in 2018, making some people a lot of money. Since then, these currencies have undergone huge price swings and are now worth a fraction of their previous value. As cryptocurrency is relatively new and lacks regulation, it is considered to be a speculative asset.
Being able to identify what type of speculative investment you’re looking at will help you better assess risks and opportunities.
Types of Investments
Investments form an important part of future financial planning. They aim to make your money work for you by putting it to use.
What’s the point of having it lying around in a bank account with a low-interest rate? As time goes by, any money saved will start to decrease (dramatically) in real terms as inflation rises.
For example, to buy what you could have gotten for $1 in the year 1900, you now have to pay approximately $30. Meaning, your dollar today is only worth 1/30th (approximately 3%) of what it was 120 years ago.
Investing combats the effects of inflation, and surpasses it, by buying something with the intention to generate a stable, long term income.
With the Coronavirus putting everyone at risk financially, owning income-producing investments is more critical than ever before. And, you should be learning how to do it.
Investing is a more popular approach for those who want to secure their future financial freedom, because it has a much lower risk than speculative investments.
It’s important to keep in mind that your underlying investment should be one that won’t lose money, no matter what direction the economy goes in.
As the great financial guru Warren Buffett says ““Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”
In my opinion, the best investments meet the following criteria:
- Have the potential to appreciate (“increase”) in value over time
- Will pay you income (either monthly or quarterly)
- Have tax benefits
I almost never buy investments unless they meet these criteria.
This is why I primarily invest in long-term rental properties, commercial real estate, short-term vacation rental properties, and businesses that I own and operate.
If you’re looking to invest in income-producing investments, like I do, then examples of this include:
● Rental Real Estate – With income-producing rental real estate, you receive monthly payments from your tenants. These rental payments should be higher than the cost of owning and maintaining the property, so that you make a net profit every month.
● Real Estate Investment Funds – With real estate investment funds, like Cardone Capital, DiversyFund, or Fundrise, you receive monthly payments for investing in a fund that owns a portfolio of residential or commercial real estate properties. As an investor in the fund, you are paid either monthly or quarterly for your share of the cash flow profits.
● Corporate or Municipal Bonds – When you buy a bond, you lend money to a company or government. In exchange, the borrower agrees to pay you a fixed rate of interest, known as a bond dividend. These dividends allow you to generate income from your ownership of the bond(s).
● High-Yield Dividend Stocks – Certain types of stocks pay dividends to their shareholders. A dividend is a payment made by a corporation to its shareholders. These dividends allow you to generate income from owning stock positions.
● Dividend Paying ETFs – Exchange-traded funds (ETFs) are a type fund that owns assets (such as stocks, commodities, or futures), but has its ownership broken into “shares” that can be bought and sold on a stock exchange. Dividend paying ETFs pay out dividends from the assets they hold to their shareholders on a quarterly basis. On average, ETFs have lower fees than mutual funds because they have fewer operational expenses.
● Dividend Paying Mutual Funds – Dividend mutual funds are stock mutual funds that invest in companies that pay dividends. These dividends are then paid out to the owners of the mutual fund shares.
● Peer to Peer Lending – With peer-to-peer lending, you lend money to other people or businesses in exchange for receiving interest payments on your money. You act as a “bank” by providing a loan on which you are paid back your original amount plus interest by the borrower. This is another great way to receive monthly income payments.
● Franchises – With franchises, the owner makes money each month as a result of profits produced by the franchise (business). The franchise owner gets to keep the difference between the cost of operating the business and the gross profit it creates. The median annual income of a franchise owner is estimated at $75,000 – $125,000, with 30% earning $150,000 or more per year.
While these aren’t the only forms of income-producing investments, they are the most popular and tend to be the most profitable.
Differences Between Investing and Speculation
There are several key differences between investing and speculating, which include:
● Speculation aims to make high returns in a short time-frame. Investment is a medium/long term approach designed to provide stable returns.
● Investments are low/medium risk. Speculating runs on a high risk/high reward strategy.
● Investors usually (although not always) use their own money. Speculators sometimes use borrowed capital.
● Investors require more research into potential investments. Speculators rely on market dynamics and their own ‘gut’ feel.
Advantages of Investing for Cash Flow
As with speculating, investment does carry a certain element of risk, though it is much lower. We would all love to get rich overnight, by recognizing the next big startup, cryptocurrency or invention.
Unfortunately, the chances of this happening are very slim.
Instead, I would recommend that you invest your hard earned money in stable, income-producing investments that will create monthly cash flow for you and increase in value over time.
I’d also recommend that you hold these assets for one-year or longer, to benefit from today’s low capital gains tax rates, which range from 0 to 20%.
The Best Options for Your Money
Generating cash flow from investing activities is one of the many ways you can take control of your finances. Trust your knowledge when deciding which investments are the right ones for you to take.
If you aren’t sure, that means you need to continue to invest in your financial education. The more you know, the sounder your investment choices will be.
If you’re not sure where to turn to own income-producing investments, you could consider putting your money into:
Real Estate Funds
Dividend Paying Stocks
Dividend Paying Mutual Funds
Dividend Paying ETFs
Finally, if you want to invest alongside me in the future, drop me a note here. I’d be interested in learning more about your skill set and/or your local market, especially if you live in a strong real estate market. Perhaps we can do a deal together.
To learn more about skills and strategies to expand your income, explore the blog.
Do you have questions about investing versus speculating? Ask them in the comments below.