We invest our money because we want it to grow or give us an income. But depending on what you invest in, there are different types of investment returns.
Interest income is probably the best understood: it is what you earn when you deposit money with a bank or buy a bond.
Interest is paid to you by the institution for the right to use your money. You deposit your money with a bank who then lends it to someone who pays the bank interest for the use of those funds.
In the case of a bond, such as a government bond, the government pays an interest rate for borrowing those funds.
There is usually an agreement of the amount of interest you will earn over a specific time period.
Assets such as property and shares earn both income and experience capital growth.
Capital growth is the return you receive from the price increase of an asset you have invested in – this applies to any asset that grows in value, typically shares or property. You only receive this when you sell the asset.
Rental income is the income you receive from renting out an asset ‒ property is a typical example. This is usually defined in rand amounts although you can calculate the rental yield by dividing the annual rental by the value of the asset. This would give you the income as a percentage of the investment.
Not many people are aware that you can earn an income from shares. This is called a dividend and is an amount that the company pays out to its shareholders twice a year. Dividends can play an important part of retirement income if you have built up a sizeable share portfolio.
Invest for the right type of return.