I recently came across a savings account from a prominent UK bank that offered an annual 0.5% rate. With returns this meagre, I see investing in companies as a far better option to build a passive income.
Indeed, the recent FTSE 100 correction has offered the chance to buy in at bargain-basement prices. This can lead to a healthy additional income stream.
In this article, I will outline how I’d build passive income from the stock market if I was starting from scratch with just £40 a week.
A strong baseline
The first step I would take is to put a significant amount of the £40 each week into a low-fee FTSE 100 tracker. These funds track the performance of the Footsie and are among the lowest-risk investments I could make.
The FTSE 100 – the 100 largest companies on the London Stock Exchange – has handed investors average returns of 8% per year historically. The 8% a year takes into account bear markets like the Great Financial Crisis and the Dotcom Boom.
Let’s say I invested the full £40 per week into a FTSE 100 tracker and reinvested all dividends. It would take five years to reach a £1,000 income using an 8% rate of return. Over a 25-year period, that £40 a week would lead to a £12,580 return – over £1,000 per month.
| End of Year | Total Saved | 8% Return |
| 5 | £12,619 | £1,010 |
| 10 | £31,162 | £2,493 |
| 15 | £58,406 | £4,672 |
| 20 | £98,437 | £7,875 |
| 25 | £157,255 | £12,580 |
Of course, it’s important to bear in mind that it would not be exactly 8% each year due to stock market fluctuations. And past performance is no guarantee of future returns.
Still, the table shows how even £40 a week can lead to impressive gains due to the power of compound interest. “The eighth wonder of the world,” as Einstein’s famous maxim goes.
How I would improve passive income
I would look to invest in specific companies with the rest of the £40 each week. With a few smart choices, I’d feel confident to improve the amount of passive income my investments would make.
My strategy would be to look for companies that have strong growth potential in the long term. Tech stocks have a history of outperforming the market, as anyone who invested in Amazon, Tesla, Apple or Microsoft can tell you. The larger tech stocks have taken a bruising in 2022, too: Meta being down nearly 70% is one notable example. This offers a chance for me to get in on the cheap.
Smaller tech companies and startups can offer me tantalising returns, too, although research would be key. Anyone can point out an Amazon after the fact, but only a few bought into the online bookseller early enough to see the truly stratospheric gains.
I would look to invest in companies with strong fundamentals over the long term. The markets are often irrational in the short term, but in the long term good companies win out. And I would look to hold between five and 10 separate companies to minimise risk.
