I’m always looking for ways to generate passive income. And as Warren Buffett once said: “If you don’t find a way to make money while you sleep, you will work until you die.”
It’s often believed that you need loads of cash to start seeing handsome returns. But I strongly disagree with this view. The average UK savings total adds up to £7,500. But with £1,000, investors can begin to make extra funds outside of their main source of income.
Here are some things to consider.
Investing in stocks
The first thing is to work out where to put my money. And I think the best place to start is the stock market. With rampant inflation leading to base rates around the world reaching attractive levels, including 5.25% in the UK, some investors may opt to leave their money in savings accounts. However, what these savings accounts fail to offer is growth opportunities.
Selecting the best
So, if the stock market is where I decide to put my money, what’s next? Well, it’s about selecting the right companies.
For this, I’d use the FTSE 100. The index is the home to high-quality stocks. On top of that, the average dividend yield is around 4%. This year, it’s predicted that it will return £78.7bn to shareholders via dividends.
Within the Footsie, I’d also do my due diligence and find stocks that I see providing stable growth in the years ahead. Additionally, finding companies with a solid track record of paying out to investors, such as Dividend Aristocrats, is a step I’d take.
Dividend payments can be unstable. And major events such as the global financial crash of 2008, or more recently the pandemic, can lead to these payouts being reduced or stopped altogether. However, selecting businesses with a stable history would provide me with more confidence.
Giving it time
As well as the above, there are a few further factors I’d consider.
First of all, I’d make sure any spare cash I have at the end of the month goes towards investing. By doing this, I’d speed up the process of building up my investment pot. With this, I’d benefit from the power of compounding. That means by reinvesting my returns I’d be able to build my pot even faster.
On top of that, I’d also think about the bigger picture. When I buy a stock, I don’t think in weeks or months. Instead, I plan to hold it for the years and decades ahead.
So, let’s put this into practice. If I invested £1,000 with an average 7% return, after one year I’d have earned £70 in passive income. While that’s not much, after 30 years, I’d be making closer to £250 a year.
On top of that, by investing an additional £150 a month, by year 30 I’d be making nearly £13,000 a year in passive income. What’s more, my pot would be worth nearly £195,000.
Reaping the rewards
Of course, a 7% return isn’t always guaranteed. However, by doing my research and selecting the right companies, while also topping up my pot and thinking long-term, I’m confident over time I could see some healthy returns.
