Having a little extra income each month can go a long way in today’s economy. The extra cash flow can be used to pay off old debts, cut back on working hours, or saved and reinvested.
The good news is that there are several ways to generate extra money every month. While results can't be guaranteed, let’s figure out how much money you need to invest to potentially make $1K per month, then discuss 5 actionable investment strategies.
Key takeaways
- Based on the $1,000 per month rule, an investor needs savings of $240,000 to withdraw $1K per month for 20 years during retirement.
- Fortunately, there are several ways to make $1K per month by investing instead of spending those savings.
- Rental real estate, REITs, dividend stocks, high-yield bonds, and private money lending are 5 actionable ways to potentially make $1K or more per month.
Is it better to invest or pay off debt first?
As a rule of thumb, the answer to this question depends on two things. First, the cost of the debt or the interest expense, and second, the potential return or earnings on the money invested.
For example, if the mortgage interest expense on a single-family rental property loan is 4% and the anticipated annual return is 8%, it makes more financial sense to not pay off a low-interest rate debt, everything else being equal. On the other hand, if the interest rate on credit card debt is 18%, it might be difficult to find an investment that generates a higher return that isn’t exceptionally risky.
According to Money Crashers, a website dedicated to helping people take control of their finances, there are several steps to take when deciding whether to invest or pay off debt:
- Get intimate with debts by building a list to understand the associated costs, such as interest rates and annual fees.
- Proactively reduce the cost of existing debt by rolling high-interest debts into a balance transfer credit card or refinancing an existing high-interest rate loan.
- Understand the potential risk and rewards by learning about different types of investments, such as owning stocks and bonds or investing in rental real estate.
Once you’ve made the decision to invest, the journey begins with understanding the $1,000 per month rule.
What is the $1,000 per month rule?
The $1,000 per month rule is a simple metric used by financial planners to determine how much money an investor needs to have in savings to generate a pre-tax income of $1K per month for 20 years during retirement.
Assuming a deduction rate of 5%, savings of $240,000 would be required to pull out $1,000 per month:
- $240,000 savings x 5% = $12,000 per year or $1,000 per month
While the rule is easy to use, it’s based on a couple of assumptions that may or may not be correct.
First, the rule assumes the savings amount doesn’t change at the same time deductions are being made. For example, there’s volatility risk to consider if the funds are held in the stock market. If the stock market drops by 10% in 1 year, savings would decline to $216,000.
Secondly, $240,000 will last 20 years (ignoring interest) if $12,000 is deducted each year. After 20 years the money runs out, and so does the $1K per month in income, assuming that the savings balance doesn’t increase.
But what happens if an investor wants to have his or her cake and eat it too? In other words, is there a way to generate an income of $1,000 per month without tapping into a nest egg?
Happily, the answer is “Yes!” In the next section, we’ll discuss 5 strategies that may help you make $1K per month while still keeping those hard earned savings intact.
5 Strategies to potentially make $1,000 per month
There are countless ways to potentially make $1K or more per month, ranging from buying a business with a proven track record to a more speculative investment like cryptocurrency.
Let’s focus on 5 common and actionable strategies to invest $240,000 and seek a return of $1K per month.
1. Rental real estate
The American industrialist Andrew Carnegie once said, “Ninety percent of all millionaires become so through owning real estate.” We haven't fact checked Mr. Carnegie's assertion, but with an endorsement like that, it makes sense to begin our discussion with investing in rental real estate.
Real estate investors generate monthly cash flow by using rent collected from a tenant to pay a property’s operating expenses and the mortgage, if financing is used. Money left over at the end of each period is called positive cash flow.
To illustrate, let’s assume an investor purchases a single-family rental property for $240,000. Gross rental income is estimated using the 1% Rule, which states that a rental property should generate a monthly rent equal to or greater than 1% of the purchase price.
Operating expenses are estimated using the 50% Rule, which states that half of the rental income is used to pay for operating expenses like property management and leasing fees, repairs and maintenance, and property taxes and insurance.
Based on these two rules of thumb, cash flow from $240,000 should look something like this:
- Annual rental income: $28,800 ($240,000 x 1% = $2,400 per month x 12 months)
- Operating expenses: $14,400 ($28,800 rental income x 50%)
- Cash flow before taxes: $14,400 or $1,200 per month
- Return: 6% ($14,400 cash flow / $240,000 cash invested)
Based on this example, investing $240,000 in just 1 single-family rental property would make more than $1K per month.
Of course, cash flow isn’t always the same from one month to the next due to factors such as unexpected repairs or an extended period of vacancy until a qualified tenant is found.
A good way to get an idea of potential returns from single-family rental homes across the U.S. is by visiting Roofstock. At any one time, there are hundreds of rental properties listed for sale with potential returns much higher than the 6% used in this example.
2. REITs
REITs (or real estate investment trusts) are companies that purchase, own, and operate different types of real estate, including residential and commercial, farmland, and special use properties like assisted living and self-storage.
Shares of a publicly-traded REIT can be bought and sold on major stock trading platforms just like normal stocks. They may be a good option for making $1K per month because a REIT is required by law to distribute 90% of its annual net income to shareholders as dividends.
According to Nareit, as of October 31, 2021, equity REITs have an average dividend yield of 2.79% while mortgage REITs have an average dividend yield of 8.23%. Based on a $240,000 investment, a residential REIT might generate an annual return of $6,696 or $558 per month, while a mortgage REIT might generate an annual return of $19,752 or $1,646 per month.
One potential drawback to REITs is that shares can be easily sold, making them susceptible to volatility. Although REITs generally have a low correlation with the overall stock market, prices may still decline due to volatility when the overall stock market goes down.
3. Dividend stocks
Growth stocks like Facebook, Twitter, Google, and Tesla are known around the world, but they may not be a good choice for making $1K per month because they don’t currently pay dividends.
However, there are companies with household names that pay an annual yield of 5% or more. According to this analysis from U.S. News & World Report, the 9 highest dividend-paying stocks include:
- Exxon Mobil 5.6%
- Kinder Morgan 5.9%
- Altria Group 7.5%
- AT&T 8.1%
Assuming $240,000 was invested in AT&T, the annual dividend income would be $19,440 per year or $1,620 per month. As the report points out, while it is possible to find companies that pay higher dividends, many investors are only interested in larger and established firms that provide their shareholders with peace of mind by consistently paying dividends year after year.
4. High-yield bonds
Investing in a high-yield bond fund may be an option for an investor willing to accept a higher level of risk to seek $1K per month. That’s because bonds that pay a high interest rate are generally issued by companies that are more vulnerable to credit and economic risk than a high-quality company such AT&T.
One way to help minimize the risk of investing in high-yield bonds is to purchase shares of an actively-managed ETF. Three high-yield bond ETFs to consider for Q1 2022 are VanEck Fallen Angel High Yield Bond ETF with an annual dividend yield of 4.01%, iShares Fallen Angels USD Bond ETF with an annual dividend yield of 3.63%, and the High Yield ETF with an annual dividend yield of 6.81%.
If $240,000 was invested in the High Yield ETF, an investor could expect an annual return of $16,344 or $1,362 per month.
5. Private money lending
A fifth way to potentially make $1K per month is by becoming a private or hard money lender. A private lender is a company or individual more willing to work with borrowers with bad credit, or people looking for creative financing that a traditional lender like a bank or credit union can’t provide.
While private lenders may provide a wide variety of financing, the two most common loans are for real estate and personal use. Similar to the way a mortgage REIT works, a private lender who makes a real estate loan receives regular principal and interest payments, in addition to loan origination fees and points charged to a borrower.
The interest rate charged by a private lender may range between 6%-15%, depending on factors such as a borrower’s down payment, length of loan, credit score, income, and other assets. Assuming an investor used $240,000 in capital to make a private loan with a 10% interest rate, the expected return might be around $24,000 per year or $2,400 per month.
Of course, as with any other lender, a private money lender must take the time to thoroughly vet a borrower, understand what the funds will be used for, and how and when the loan will be repaid. If a borrower defaults, a private lender will foreclose on the property and resell it to pay for the borrower’s outstanding loan balance.
Final thoughts
There are a variety of ways to potentially make $1K per month or more, depending on how much risk an investor is willing to take as part of their portfolio.
In addition to focusing on how much money per month an investment could generate, an investor may also wish to consider how much the asset could appreciate over time. For example, according to the Federal Reserve, the median sales price of houses sold in the U.S. has increased 81% over the last 10 years (Q3 2011 to Q3 2021).
If home prices continue to appreciate at that rate, in just a few years an investor could pull money out of one rental property to buy a second one, potentially turning $1K per month into $2K per month or more.
