Passive income is the holy grail of investing for many. And its the same for me. However, as I don’t need the money now, I tend to put it aside for future use.
I’ve been investing for some time, but with some big purchases on the cards, I could be starting 2023, and my 30s, with very little savings.
So let’s take a look at how I could build wealth and generate passive income starting with just £5 a day.
Investing regularly
Regular investments add up over time. That’s simple. But it’s something that many investors don’t do. For example, if I could put aside £800 a month, after 30 years, that’s a huge £300,000. But naturally, I’d be investing that money and I’d hope to grow that figure substantially.
Investing regularly also allows me to iron out the peaks and troughs of the market. The general trend of the FTSE 100 is upwards. In fact, over 30 years, the index has grown fourfold.
Picking the right strategy
If I’m investing £5 a day, which these days can the price of a coffee in London, I’m essentially committing to £1,800 a year. And, after 10 years, I’d have put away £18,000.
I could put this money into growth stocks and hope to see some upward movement in the share price. But this can be risky. Many growth stocks fail, just like new businesses we may see on our high streets.
Instead, I prefer using a compound returns strategy. This involves investing in dividend stocks and then reinvesting these dividends. This allows me to earn interest on my interest. It’s like the snowball effect, and the longer I leave it, the more I’ll have.
So let’s assume I want to start using my passive income from my investments in 10 years time.
Well, if I invested in dividends stocks, paying a 5% yield on average and then reinvested that dividend every year, after 10 years I’d have around £24,000.
However, this calculation doesn’t account for share price growth. So if I make sensible investments, and based on historic performance, after 10 years that £24,000 could be worth closer to £30,000.
With stocks paying 5% dividend yields, I could expect £1,500 every year from my £30,000 investment. That’s not a bad return for just putting away £5 a day for a decade.
Naturally, the longer I reinvest my dividends the more money I will have. After 30 years of investing £150, I’d have £124,000. And I could even double that to take into account share price growth. But I also have to accept that I could lose money if my investments don’t work out.
Sensible choices
Finally, I need to make sensible choices. I need to be wary of big dividends and pick stocks that I truly believe in.
Legendary investor Warren Buffett teaches us to stick to what we know. And that’s key. It’s hard to truly assess the value of a company if I don’t know what it does or understand the industry in which in operates.
That’s why I favour established firms in traditionally safe sectors, such as Lloyds and Legal & General. To some, these stocks might be a bit boring but, for me, their sizeable dividends and positive track record make them perfect for my compound returns strategy.
