With annual inflation recently reaching its highest level in nearly three decades, I reckon unearned income could help me combat the impact on the cost of living. That is why I have been thinking about my 2022 passive income plans.
Even starting from scratch, I think it is possible to build passive income streams for just a couple of pounds a day. They may be modest in the beginning. But over time, hopefully little acorns could grow into oaks.
Why £2 a day makes sense
Why would I think about a passive income plan using only £2 a day? If I had more money would it not make sense to use that too?
Yes it would. If I could use more funds, indeed there would be some benefits to me. I could build bigger passive income streams faster. But I like the idea of using £2 a day precisely because it is a modest place to start. It is easy to begin with big ideas, but then when the first obstacle comes along, like an unexpected bill, I may lose momentum on my passive income plan. I think putting aside £2 a day should be consistently achievable. That could help me build discipline, which is a bedrock of long-term investing success in my view.
Dividend shares as passive income ideas
Just putting a couple of pound coins in a jam jar each day will not earn me any income on its own, though. That is just saving. To start generating money from it, I would invest it in dividend shares. That way I could benefit from the hard work of successful companies when they pay out profits as dividends.
£2 a day adds up to £730 a year, so I need to be realistic about my expectations. The average FTSE 100 yield tends to be around 3-4% most of the time. So I would expect annual passive income of around £22 to £29 from my first year of putting aside £2 a day. But if I keep up with the disciplined habit, hopefully the income will increase. Once I buy shares, I can receive dividends until I sell them. So over the years my passive income streams should mount up, even if I am still only putting that £2 a day into my plan.
Putting my 2022 passive income plan into action
Dividends are never guaranteed, as companies can run into unforeseen difficulties or simply change their spending priorities. So I would diversify across different shares and business sectors. That should help me reduce my overall risk.
Some shares yield far more than 3-4%, such as British American Tobacco, M&G, Legal & General and Rio Tinto. But I would not focus only on dividend yield when building my passive income streams. With a long-term approach I would want to find companies that I thought might actually be able to pay higher dividends in future as their business prospects improve. Those will not necessarily be the highest-yielding shares today. To choose such shares, I would keep a lookout for companies with a strong competitive advantage and the opportunity to generate substantial cash flows for years to come.
