Often, when I talk to people about building up a passive income pot by investing in shares, I get a similar response.
The stock market is only for rich people, and you need thousands of pounds to even start, don’t you? It’s a common belief. But it really isn’t true.
In fact, it’s entirely possible for savers to put away modest sums to build an extra income stream to help fund their retirement. The secret is time.
Modest sums, invested each month over decades, can turn into healthy nest eggs. It’s all down to the miracle of compounding. But £5 per day?
Monthly cash
Let’s call it £150 per month and see where it might get us.
First, I want to know what Stocks and Shares ISA returns we might expect over the long term. Over the past 10 years, the average has come in at 9.6% per year.
That’s with both share price gains and dividends. And to boost our returns over the long term, we really should reinvest any cash we get from our shares.
We can’t say what future returns will be. And I think that expecting ISAs to go on at 9.6% might be a bit optimistic.
Realistic target?
So I’ll go with 7%. It’s not a prediction, but I think it’s a more realistic expectation. Where would £5 per day, or £150 per month, get us at that rate?
I said the secret is time, and it will take a while to reach a good sum. But 30 years of regular investing at this rate could build up to a pot of more than £175,000.
If that can be done, a further 7% per year from then on could be taken as income. And it would provide a bit over £12,000 per year.
So £150 per month starting now could give us £1,000 per month in 30 years time.
No shortcuts
People might have more ambition and seek riches in a lot less time. But that would need either more cash to start, or a better rate of return.
If we don’t have the extra cash, the first option is out. And I don’t know of any investment that’s provided better long-term returns than company shares.
And for many people, 30 years really isn’t so long, is it? There are young people out there with 30, 40, even 50 years of working life ahead of them.
When you start your first job, could you put £5 aside per day from your pay? It’s cash you never had before, so how could you miss it?
Start young
It can be a lot harder once we get used to spending all our wages, and the monthly commitments are building up. Well, you know what it’s like.
So, start early, invest in shares each month, reinvest all dividends, and give it the time it needs. That’s my take on the best way to build up some long-term passive income.
Oh, and the same investment above for 50 years could net as much as £760,000, for more than £4,400 per month.
