A daily £4.47 doesn’t sound like much. But if I invested it smartly, I could earn a sizeable nest egg that would pay me lifelong passive income.
That £4.47 is, apparently, now the average cost of a pint of beer. I could take this piece of information as a cue to curse the speed of inflation, or perhaps to reminisce about the (much) cheaper prices I used to enjoy.
Instead, let’s see what kind of passive income I could build with it. One day, it might even provide me with thousands of pounds each year. But before I get to that, I run into a hurdle right away.
For starters, I’m not saving much money. My £4.47 a day is about £30 a week or £120 a month. On the one hand, that’s a feasible amount to save from my ‘recreational’ budget. On the other, it will require an investment approach that builds the amount I’m saving into a much larger sum.
I’ll take the slow and boring approach here. Risky investments like penny stocks or options contracts won’t be part of my strategy. They might work for some people, but I want steady, low-risk income generation. So, what might I invest in?
The plan
My plan is to search for companies that will thrive for decades. I’d view my investment, as Warren Buffett does, like I’m a part owner. If the company performs well, my shares will reward me.
I might expect a return of only 10% a year on average, and 10% of £4.47 won’t even fetch me a 50p coin. But a small increase each year obscures the powerful multiplying effect of compound interest. The final calculation could be very big indeed.
Final calculation
Over a three-decade timeframe, with a 10% average per year, the daily £4.47 builds to a £295,218 nest egg. That’s a whole lot of cash for skipping out on seven pints a week.
| £4.47 a day | |
| 1 year | £1,795 |
| 5 years | £10,957 |
| 10 years | £28,603 |
| 20 years | £102,792 |
| 30 years | £295,218 |
A three-hundred-grand sum is all well and good, but there are risks here. The one I’m most concerned about with my finances is the future economy. Sure, we’ve had decades and even centuries of excellent growth, but that’s not guaranteed to continue. It’s like the old saying: past performance is no guarantee of future results.
And even if I can achieve this total, I want income here, not a big number in my broker account. My next step, then, is to work out how much passive income I can withdraw.
Passive income
The Trinity study explored this topic in detail. It found that a 4% withdrawal per year – called The 4% Rule – is extremely safe over multiple decades, even taking future inflation into account.
If I withdrew 4% from my near £300k, I’d have £12,000 per year without eating into my nest egg.
| £4.47 a day | 4% withdrawal | |
| 1 year | £1,795 | £72 |
| 5 years | £10,957 | £438 |
| 10 years | £28,603 | £1,144 |
| 20 years | £102,792 | £4,112 |
| 30 years | £295,218 | £11,809 |
Around a thousand a month sounds pretty nice to me, especially from saving the cost of a pint of beer a day. And remember, this is just a blueprint, if I can budget my way to more savings then I could see my passive income grow even higher still.
