Building a passive income offers investors the opportunity to generate extra funds with very little extra work. And while this may seem optimistic, it’s more than doable.
Inflation has wreaked havoc and not everyone has the luxury of having lots of disposable income. But despite what many may believe, investing small amounts in the stock market over the long term can see these funds build.
With as little as £5 a day, here are the steps I’d take to create passive income streams that could serve me for the years ahead.
Consistency is key
The first step I’d take is to ensure I invest on a consistent basis.
It’s easy for financial plans to get derailed with unexpected costs cropping up. But by sacrificing just £5 a day, I’m confident I’d be able to build a sizeable pot.
This equates to £35 a week, or £1,820 a year. With a return of 8% (the average FTSE 100 annual return since its inception), this would see me earn around £1,650 in interest after five years.
More so, by continuing to invest over a longer time period, I’d be able to witness the power of compounding.
If I keep on with this method over a 30-year span, I’d have earned over £160,000 from my investments. And my pot would be worth over £215,000!
Target high-quality stocks
Secondly, to achieve this, I’d have to pick out high-quality stocks. And while this may sound difficult, the FTSE 100 is a great place to start.
The index is jam-packed with a variety of companies offering investors high dividend yields. As I write, there are 15 with yields of 6% or more.
Of these, I already own Legal & General. And there are plenty of other stocks on my watch list, such as British American Tobacco and M&G.
To improve the likelihood of generating consistent returns, I’d target a variety of industries within the Footsie. By doing so, I’d ensure my investments aren’t dependent on a single company or industry.
There are also many firms that have slightly lower yields, but still above the Index’s average (around 4%). Stocks in my portfolio that fit this criteria include Lloyds and Barclays, which offer yields of 5.9% and 5%, respectively.
Boosting my returns
Finally, there are other methods I could employ to help me achieve my goals quicker.
For example, I’d look to put any spare cash I had at the end of the month into my pot. The more cash I invest, the greater rewards I’ll reap in the long run.
While a top-up of an occasional £20 may seem insignificant at the time, as the years goes on it most certainly makes a difference.
Next steps
Of course, there are risks that must be considered.
Firstly, stock market returns are volatile. And therefore an 8% return isn’t always guaranteed. We saw the impact unexpected events such as the pandemic had on the stock market. Furthermore, dividends can be cut at any time by a business.
However, by being consistent and investing for the long term, I’m confident that by employing these methods I could build a solid passive income that would serve me in the years ahead.
