Good ideas do not always need to be complicated or require a lot of work. While some people pour lots of time and effort into wacky schemes to set up passive income streams, my own approach is fairly simple. I save money and invest it in shares I hope will pay me dividends in future.
I think it is possible to do that by regularly putting aside a fairly modest sum of money. Here are the three steps I would take to start with £30 a week.
1. Put aside money every week
Getting into a habit can take some effort, but I think the discipline of weekly saving can be motivating. That way, when there are other demands on my cash, I think I am more likely to stick to my plan.
I would set up a regular bank transfer, or get into the habit of physically saving £30 in cash on the same day each week. When it comes to setting up passive income streams, I think a lot of people fall at this first hurdle simply because they do not turn their plans into action.
2. Learn about dividend shares as passive income streams
If putting aside £30 a week, it would take some time before I had a big enough sum of money saved up to make me feel it was worthwhile to start investing.
I would use this time to learn more about how the stock market works. I would want to understand what sorts of dividend shares might suit my objective to set up passive income streams. For example, would it suit me better to invest in a company with a high dividend yield like Imperial Brands, or should I focus on a lower-yielding company with a history of increasing its payout, such as Diageo?
If I think a company has a good business model – like Games Workshop – does that also make it an attractive investment for me? After all, there is a difference between a good business and a good investment.
And should I take my dividends out as cash, or reinvest them?
All such questions could turn out to make a big difference to the performance of my investments. So I would want to learn more to help me understand better the shares that could hopefully offer me what I want. Knowledge is power.
3. Starting to buy shares
Once I had saved up enough money and chosen some shares to buy, I would start investing. No matter how good one dividend share might seem to me, I would be sure to diversify my portfolio across different companies and fields of business. That is because all shares have risks. By spreading my investments, I would reduce the impact on my passive income of any one share’s underperformance.
£30 a week adds up to £1,560 a year. If I invest in shares with an average dividend yield of 5%, that should earn me around £78 a year in passive income. It may seem like a small start – but it is just a start. Over time, with action and discipline, hopefully I could increase my passive income streams.
