If you dream of being able to create a passive income stream but don’t think you have enough money to do so, I’ve got some news for you.
According to my calculations, it is relatively easy to create a passive income stream with just £25 of investment every single week. That’s the equivalent of three hours of work at the National Living Wage of £8.21 per hour (from April 2019).
Save and invest
For the past 10 years, the interest rates available to savers on cash savings accounts have been steadily decreasing. Today you’ll be lucky if you get more than 2% on cash balances, although you can get a bit more with regular savings accounts.
With this being the case, if you want to generate a passive income stream, you are going to need to invest your money. Investing can seem like a daunting task. However, there are plenty of tools today to help you do this without having to spend too much time and effort deciding which are the best stocks to buy.
One of the best tools, in my opinion, is the passive index tracker fund.
Today you can buy the entire FTSE 100 index with a passive index tracker at the click of a button. This will allow you to invest in 100 of the world’s largest companies with just one action.
At the time of writing, the index supports an average dividend yield of 4.5%, substantially above what you get on a cash savings account.
The FTSE 100 index isn’t the only yield option investors have. There’s also the iShares UK Dividend UCITS ETF. This exchange-traded fund invests in the 50 highest-yielding stocks from the FTSE 350 Index. At the time of writing, it offers a distribution yield of 6.9%.
With this level of income, it is relatively straightforward to build a passive income stream with just £25 of investment every week.
By my calculations, an investment of £25 every week, or £109 a month, in the iShares UK Dividend UCITS ETF would yield £49.21 of income in its first year. Including this dividend income, after 12 months of saving, the balance would stand at £1,357.21.
In the second year, I calculate the investment pot would generate a passive income of £144.48 with a final balance of £2,809.69. After 10 years of saving, my figures show a saver can look forward to £1,191.18 a year of passive income on a balance of £18,768.74. After 20 years, the pot would be throwing off £3,617.01 of passive income every year on a balance of £55,755.40.
With the average monthly mortgage figure in the UK estimated as being £700 a month, this income would allow a homeowner to meet their mortgage costs for five months of the year.
My figures also show that it would take just £250 of savings a month to build an investment pot that would yield enough income to cover mortgage payments for an entire year (assuming a monthly mortgage cost of £700 and yield of 6.9%).
The bottom line
That’s how I would create a passive income stream with £25 a month. As the figures above show, the longer you have to save, the easier it is to create this extra income stream. So, what are you waiting for?
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.