Not everyone has lots of money they can use to set up passive income streams. But the good news is that it is not necessary, in my opinion. I think I could set up recurring sources of effortless income simply by putting aside a fairly modest amount of money regularly and investing it in dividend shares. Here is how I would do it, in three easy steps.
1. Put aside £5 a day – starting today
£35 a week is £5 a day. I think it is good to get into the habit of putting aside that money on a daily basis, whether it is physical cash in a savings tin or an electronic transfer.
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Saving a little often may be easier than a lot rarely. For example, if I wait until the end of the month with the intention of making a larger lump sum payment, I may find that I have other demands on my money then. I think I am more likely to stick to my plan if I get used to making a £5 contribution each day. It will also help me get into a regular, disciplined habit. I reckon discipline helps a lot when trying to set up passive income streams with no money to begin.
I think the best time for action is right now. If I put a £5 note somewhere I will see it tomorrow, I am more likely to remember my plan and make a second contribution. Soon I will be used to putting £5 each day towards my passive income plan.
2. Selecting shares
Saving the money would be a good start. But to generate income I would need to do something with it.
By investing in dividend shares, I could receive any money they paid out. That is not guaranteed; dividends can always be cut or cancelled. So I would diversify my funds across a few different companies and business sectors. In my first year, £5 a day would add up to £1,825. That is enough to let me invest in a variety of companies.
I would not invest immediately. I would set up a share-dealing account, and then wait until I had enough money in it to start trading without dealing charges eating up a high percentage of my purchase cost. Meanwhile I would use that time to research what sort of dividend shares might suit my investment objectives. I would consider a broad spread of shares in different industries, such as ExxonMobil in energy, British American Tobacco in tobacco, National Grid in utilities, and Tesco among retailers. Each has its own risks, which I would seek to understand in my research as they could affect the likelihood of future dividends.
3. Setting up the passive income streams
Once I had found the right companies for my objectives and had enough funds, I would start buying shares. At first my income would likely be modest. If I invested in shares with an average dividend yield of 5%, for example, £1,825 should give me annual dividends of £91.
With my new-found discipline and continued action, over time I hope my passive income streams would grow.