Everyone needs to save money for a rainy day. To achieve this, you can look at different ways to increase your income and boost your savings. One of the most popular ways to get additional income is investing.
Investing requires a certain degree of calculation and risk assessment. You need to understand the risks involved and employ the safest means to get a good return. With most people considering long term locking-in of capital too risky, they are increasingly investing in stocks and bonds that give a continuous stream of income. However, if you fixate on a portfolio that is not diversified enough in terms of cash flows that it generates, you may lose money in the long term.
You want to watch your savings grow into something more than just a pittance. While it takes years to save up enough money to invest, it takes no time at all for your returns to be taxed, reducing your net return. People have a desire for a steady, safe income stream, but the reality doesn’t add up to that.
Since interest rates are rock bottom right now, you would need to invest a lot of money in fixed income securities to get a reasonable return. In maximizing income, you also run the risk of overexposing a portfolio to a certain sector of the market, which generates higher cash flow in the near terms but does not have good long term prospects.
Another problem is that though there are no perceivable signs of inflation yet, the real value of a steady income could fall significantly if inflation rises. This means that while you would be earning the same investment income as you are right now, the spending power of that money will be much lesser.
Taxes are currently at a maximum of 15% on qualified dividends. This has got people thinking that holding income generating stocks in taxable accounts will be treated in a similar manner. They could generate a steady income and allow it to accumulate without needing to sell the stock. However, this is an oversimplification, since people don’t recognize that even with dividends getting a preferential treatment, tax costs can still add a substantial drag to what a portfolio can generate.
You should look at building a portfolio that offers a combination of steady income and long term capital gains. This will be far more beneficial in the long run, especially if you’re getting close to your retirement.