They say the first step is always the hardest. Or is it? Today, I’m going to explain how anyone can build a passive income stream by setting aside just £1 a day.
What? Just £1?!
The idea of just investing £1 a day sounds a bit ludicrous, so let me explain. The actual amount put aside every day doesn’t really matter, at least initially. It could be £2, or £5, or £10, or whatever. Obviously, £10 a day is better than £1, but that may not be doable for a lot of people.
The point is simply to make the process as free of friction as possible by keeping the amount saved small enough to not seem daunting. This increases the likelihood of it becoming a habit. And developing a good savings habit is fundamental to building wealth over the long term.
Now, investing £1 a day isn’t practical. Every three months (£91), every six months (£183) or every year (£365) makes more sense. Regardless of how regularly I buy, I’d be sure to pick a stockbroker that charges low/zero commission when I use their regular investing service. This simply invests my money automatically on a set day rather than a day of my choosing.
The question that now presents itself is what to buy with this money. For passive income, I’d target dividend-paying stocks. These are companies that choose to distribute a proportion of profits to investors on a quarterly, or bi-annual, basis. Positively, there’s no shortage of such businesses on the London market.
The only issue with the above approach is that dividends are never guaranteed. So throwing all my accumulated cash into just one stock is risky.
Clearly, one solution to this would be to spread my money around a number of companies. Since we’re only starting to invest using a small amount of money, I’d probably buy a cheap exchange-traded fund that tracks an index such as the FTSE 100. Here, I’d get access to a big group of stocks in one click! Buying individual stocks is something to do further down the line.
Out of interest, the FTSE 100 yields 3.5% right now. That’s an awful lot more than the 0.67% I’d get from a Cash ISA. In fact, holding that £365 saved every year as cash is just about the worst thing I can do.
Due to the paltry amount of interest I’d be getting, it would actually lose value over time, due to inflation. Instead, I’d save my £365 into a Stocks and Shares ISA. Doing so also ensures I’ll pay no tax on the passive income I receive.
Have a little patience
I think the hardest part of growing a passive income stream is being patient. After all, investing that £365 in a FTSE 100 tracker wouldn’t generate much in the way of dividends from the off.
There are ways of turbocharging this amount, such as increasing the amount of cash per day I save once the habit has formed. I could go from £1 per day in Year One, to £2 in Year Two, to £3 in Year Three, and so on.
Since there’s no rule to say an investor must spend the money received, I’d make a point of always reinvesting it into buying more shares to benefit from compounding. By the time I really want to use that income, I should have a far larger amount to draw on.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.