If I had three pound coins to hand, I’d struggle to spend them these days. I’ve not seen a pint that cheap in years, and if I wanted a supermarket sandwich, I could only afford the plainer ones. At the same time, if I was able to save that each day – and pair it with the right investment strategy – I could aim for a life-changing passive income.
Even if I started with no savings at 40 years old, I could target an extra income stream of thousands of pounds.
I would need to be disciplined to achieve this. I would need to save every month and follow my strategy to a tee. But if I could, that £3 a day could turn into a passive income of £7,925 each year.
A steady cash inflow like that sounds lovely, but there are plenty of roadblocks to stop me getting there. In fact, I run into a big one straight away: a daily £3 just isn’t much to work with.
Big passive income
Because my plan is starting from 40 with no savings, I might save that much for 30 years so I receive my income when I retire. But even with those decades of stashing money away, my three quid a day only gets me up to £32,850.
| £3 a day | |
| 1 year | £1,095 |
| 5 years | £5,475 |
| 10 years | £10,950 |
| 20 years | £21,900 |
| 30 years | £32,850 |
By the time I hang up my boots, I’ve not got much in the way of savings. And if I withdraw from them at 4% a year – a ‘safe’ withdrawal rate – my passive income looks a bit pathetic.
| £3 a day | 4% withdrawal | |
| 1 year | £1,095 | £44 |
| 5 years | £5,475 | £219 |
| 10 years | £10,950 | £438 |
| 20 years | £21,900 | £876 |
| 30 years | £32,850 | £1,314 |
All told, I’m looking at 30 years of budgeting and saving to end up with £1,314 each year. I wouldn’t call that ‘life-changing’. I’m not sure it’s even worth the effort.
The stock market is my knight in shining armour here. If I put my money to work in a Stocks and Shares ISA, it can grow and multiply to create wealth that doesn’t seem possible investing any other way. Also, the tax advantages of the ISA account mean I keep every penny.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
I’d aim for a yearly 10% back from stocks. That’s in line with historical averages, so this isn’t a shot in the dark. I’m simply hoping the economy grows like it has in the past. And if it does, that 10% year after year will grow to a surprisingly large amount.
| £3 a day | |
| 1 year | £1,205 |
| 5 years | £7,354 |
| 10 years | £19,197 |
| 20 years | £68,988 |
| 30 years | £198,133 |
Would you look at that? My nest egg of £198,133 is about six times higher than if I’d just put it under the mattress. My 10% yearly return is working wonders, and building wealth that I can use for a big passive income.
| £3 a day | 4% withdrawal | |
| 1 year | £1,205 | £48 |
| 5 years | £7,354 | £294 |
| 10 years | £19,197 | £768 |
| 20 years | £68,988 | £2,760 |
| 30 years | £198,133 | £7,925 |
Now we’re talking. That income stream looks much more appealing. If my plan goes off without a hitch, I’d receive £7,925 passive income each year and I’d hope to receive it indefinitely. All that from £3 a day? Sounds pretty good to me.
Risks
I only have limited space here so I’ve left a lot out. How to choose the right stocks is a topic I’ve skimmed over. The risk involved is another. I will say that there is no guarantee with investing like this, and people can and do lose money with stocks.
