Step 35: Income stream 3: Interest Income

Step 35 of the 100 steps mission to financial independence: Income stream 3: Interest Income
Step 35: Income stream 3: Interest Income

So we have thought about our first income stream, which was a wage coming from a paid job, as well as the possibilities of a second income stream in the form of profit income. For most people either of these might be their main and only income stream and they might have never thought of other sources of income. Yet there are five more possibilities and even though that doesn’t mean you need to pursue them all, it is always good to at least find out more..

Let’s have a closer look at a third income stream: interest income from money lent out. Money lending and borrowing isn’t usually free, as the lender runs a risk (they might never see their money again), so the person who borrows money is required to pay interest on the loan in return, to make lending money more attractive.

We have of course already spoken about this extensively in previous steps and one way you might be lending money is by having a savings account. This might sound weird but by parking your money at the bank, you are lending this money out and telling the bank: take my money and use it for whatever you need. That is why the bank is paying you interest over your money. Now you might think: but why would my bank be interested in the measly $1.000 that I have in my account? Which is a valid thought, but you are most likely not the only one with some savings money at the bank. If there are 20 people like you, that makes $20.000 for the bank to use, for 2.000 people like you, it suddenly gives them $2.000.000!

Another type of lending money you might be doing is through bonds. We will be looking at this in a later step in more detail but with bonds, we lend money to an entity (organization or government), in exchange for interest. Bonds tend to have higher interest rates than banks as the risk is slightly higher than just putting your money into a savings account. The higher the risk, the higher the potential return usually.

Recently crowdfunding initiatives have become more a more popular, and it is an alternative used by many to raise money for a new business idea where “normal” people contribute money, from relatively small sums to bigger amounts, against an interest rate. Depending on the conditions, this interest might not start until 2 years, or until the company is making or profit or until some other condition is met, so make sure to read the small print! Not all ideas always make it til the end of their first year however, meaning you might never see (part of) your money back..

Now to go back to your savings money in the bank: you might be thinking that those $1.000 you have and with the current 0,5% interest rate, this isn’t ever going to make you big bucks. That’s true, it will give you exactly $5 gross on a yearly basis, take off income tax, depending on where you live and how much you earn, you’ll end up with about $3 – $4 a year. So no, that won’t make you rich any time soon, especially not once inflation catches up and indeed overtakes the interest rate.

But this step is not so much about using this stream to become rich, but to remember this as a possible way of generating more income, and to remember that even so, all small things eventually add up. Let’s imagine for a moment however that instead of $1.000 you have $1.000.000 in your bank account (a big jump, I know, but play along for now!). Instead of getting $5 gross interest, you are now receiving $5.000. That’s suddenly a bit more interesting (although I admit when you have a million dollars, $5.000 might seem like nothing). Let’s also assume however that the 0,5% interest rates go up again to say 3% (which in case you don’t remember isn’t even that much! Look up the history of interest rates and you’ll find there have been times in the past 40 years when it was more than 10% or indeed 15%..). Instead of $5.000 you’d now get $30.000 gross a year. (I take it you’re no longer complaining now!) That’s a monthly gross income of $2.500. Not bad huh?

So indeed, at the moment with the low-interest rates, you need a LOT of money in order to get any decent returns on your savings and yes this income is very unpredictable due to the fluctuation of those interest rates, but it is for sure not bad to remember that interest income is another possible way to make some money, especially if you leave it compounding more and more interest over the years.

Another great advantage of interest income is that it is a truly passive income stream, i.e. you don’t have to do anything to get the money, as it doesn’t require you to work (unless you count your regularly check whether your bank still offers the best conditions compared to other banks).

Step 35 – Income Stream 3: Interest Income – in detail:

  • Go back to the list you made in step 32 where you listed how much income you have coming in from interest at the moment (if any at all).
  • How are you doing with your savings goals? How much money are you able to deposit every month and how does this affect your interest generated?
  • Calculate a few years ahead (use an online calculator if needed), to see how much interest you’d receive if you keep up or even increase your monthly payments.
  • Consider crowd funding and look into this as a possible way of lending money and getting interest. Talk to others about their experience and websites they have used and determine whether this might be something for you or not. (I actually decided to put this on hold as I read too many negative reviews, but I know some people have had very decent returns).
  • We’ll get to bonds in later steps, but if you already have bonds, look at what they are giving you in terms of interest and analyze if you want to buy more.
  • When it comes to interest received, remember though that instead of taking this money out, what would be a lot more powerful is to not do anything with your money, leave it where it is and let it accumulate more and more money through compounding. In that way the money grows even more over time, giving you bigger savings and ultimately even more income.

That’s all for now for the interest income. We’ve now covered the first three income streams, the ones that most likely you had thought about before or at least had some knowledge of. Next up are the remaining 4 income streams that might be less obvious for most people to consider.

Read more about my 100 steps mission to financial independence or simply decide to take control today and join us on our step-by-step quest on how to make your finances work for you, starting with step 1.

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