Having a passive income, and being able to earn money while you sleep can revolutionise your finances! You won’t have to worry about work, and you can put your cash flow on autopilot. One of the best ways to generate a passive income is to invest your money and I think you can build a passive income-generating portfolio with an investment of just £50 a week.
The benefits of compounding
If you want to start generating a passive income straight away, you need to start saving as much money as possible. The good news is, you don’t need to earn thousands of pounds a month to be able to build an investment portfolio that’s big enough to give you a passive income.
One of the most attractive things about investing is the benefit of compound interest, essentially the process of your money making money. So, the more you save, the more you will earn. As well as earning more money, when you start generating a passive income, you’ll have more time to spend on other projects that will help you achieve the same aim.
Building a pot
How much you need to save depends on what level of income you want to achieve. For this example, I’m going to target an annual income of around £5,000. This isn’t a tremendous amount (compared to the UK’s average annual salary of £29,000 per annum), but it will provide you with a level of basic income to help you start your passive income journey.
I’m also going to be using income funds in my example. These give investors diversified exposure to income stocks, which I think is a better option if you’re looking to generate a passive income. With single stocks, if just one of the companies you’ve chosen decides to cut its payout, your income could take a sudden hit. The best way to avoid this is with diversification, but building a portfolio of say 50 stocks to improve diversification can be quite expensive.
Finding an income fund
I think one of the best income funds around is the iShares UK Dividend UCITS ETF. The fund tracks the FTSE UK Dividend Plus index, which includes the 50 highest-yielding companies in the FTSE 350 Index and costs just 0.4% per annum. At present, the ETF supports a yield of 6.9%.
At this rate of return, I calculate a saver would need to put away £50 a week, or an average of £217 a month, for 17 years to build a savings pot worth £83k, throwing off around £5.2k a year in passive income. In this example, I’m assuming there are no withdrawals during the first 17 years to allow the power of compounding to really work its magic.
On contributions of £500 a month, I calculate it’s possible to hit my passive income target within 10 years (once again assuming no withdrawals until this point). With a deposit of £650 a month, or £150 a week, it would get you there in eight years, according to my figures.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.