Most of us have to work for a living, and we don’t have the cash to sit back and take it easy. I like my job. But I still want to build a passive income stream for later in life.
It might not take a huge amount of money to do it.
After all the years I’ve been working and investing, there’s one key thing I want to pass on to younger investors. That’s to start early. The sooner we start, the longer we’ll have for the miracle of compound returns to weave its magic.
I reckon the best way for young people to get going is to save money they never had before. It’s money they won’t miss. What am I talking about?
Start early
Imagine someone starting their first job. If they can set aside £10 per day from their salary, they surely won’t miss it. So just pretend it’s not there, and transfer it to a Stocks and Shares ISA.
Most ISAs will let us transfer regular small sums. And we can save the cash until we have enough to buy some shares.
Then, through life, we’ll hopefully get pay rises. And sometimes we’ll change jobs for more money. So what if we take a bit extra from our growing income and raise our ISA contributions?
Again, it’s money we hadn’t had before, and money we surely won’t miss.
Just £10 per day?
But can £10 per day really add up to much?
Over the past decade, the average Stocks and Shares ISA return in the UK has come in at 9.6%.
There’s no way to tell what future returns will be like. But UK shares have easily beaten other forms of investment for more than a century now.
So what if someone starts work today at age 20? They then stash away £10 per day, and invest it in UK shares in an ISA. Let’s suppose they achieve that 9.6% annual return on average.
By the age of 50, they could have built up a pot of more than half a million pounds. Imagine being able to retire at 50 with that much cash.
Another 10 years
Work and invest for another 10 years, and that half a million could grow to £1.5m.
The final decade would be worth nearly twice as much as the first 30 years. That’s the power of compound returns. And it shows the benefits of building up as big a pot as early as possible.
Now, I perhaps wouldn’t bank on 9.6% per year. In fact, investments can go wrong and we can lose money. But a diversified portfolio helps and even 8% for 40 years could get our new investor close to a million by the age of 60.
Just the start
And why stop at £10? Bump it up to £12, £15, or whatever for every pay rise. And then a bit more for a job change and a bigger salary jump. That £10 per day is only the start.
Remember, small knocks break big rocks if we keep banging for long enough. And small amounts of money invested for the long term can compound up into big sums.
