I think it’s relatively straightforward to build a passive income stream with just a small daily investment. Today, I’m going to explain how I plan to use this approach to cover some of my monthly spending needs.
Building a passive income
The first step on a passive income journey is to build a savings pot. The size of savings required depends on your passive income target. Some investors will want to earn a lot of money every month. Others may have a more moderate target.
I’m targeting a monthly income stream of £500. This will cover the majority of my housing costs, which should help me save more in future.
With a monthly target of £500, or £6,000 a year, I reckon a savings pot of at least £150,000 is needed to achieve this target.
My figures tell me it may be possible to hit this target with just £10 of investment per day. It won’t happen overnight. But by sticking to a regular investment plan, I think it’s possible to hit this target.
Building the pot
An investment of £10 a day works out at roughly £3,650 a year. That’s £304 a month. By investing this money in the stock market, I may be able to rapidly hit the £150,000 target required to build a passive income stream.
You see, over the past 120 years, UK stocks have produced an average annual return of around 7%. Due to the size and length of this study period, I think it’s sensible to rely on this as a possible return target going forward.
At a compound annual growth rate of 7%, I calculate it’s possible to build a savings pot worth £150k in just 20 years. This is only a rough guide. It may be possible to hit this target sooner if you can save a little bit more every month.
For example, it may be possible to hit the target within 14 years with an investment of £500 a month. And if you can afford to invest £1,000 a month, it would take less than 10 years, according to my calculations.
Generating an income
The best way to generate an income on this lump sum may be to buy a basket of high-quality blue-chip stocks. The UK market as a whole currently offers a dividend yield of 3.5%. That would produce a passive income stream of £5,300 a year.
Some stocks offer dividend yields that are above average. Life insurance group Phoenix and car insurance giant Direct Line both offer dividend yields of between 6% and 9%.
A portfolio of these high-yield stocks could generate a significant level of income on a savings pot of £150,000.
That’s the strategy I plan to use to make a passive income stream with an investment of just £10 a day. By following a set investment plan, I reckon it’ll be relatively straightforward to hit my passive income target.
