These days, four pound coins will barely buy me a meal deal or a pint of beer in a pub. But I think if I invested that amount daily then it could lead to a surprisingly large nest egg, one that could give me passive income for life.
The key to building this income source would be to invest in stocks and shares. I’m already working towards something like this, but let’s say I was to start again with just £4 a day. Here’s how I’d do it.
The key to the strategy
If I only had £4 a day to start with, then it rules out a few options. A buy-to-let property, for example, would need an upfront deposit. Also, I want income that’s passive, so I don’t like the idea of getting a late-night phone call because a roof fell in or the boiler packed up.
Another form of so-called ‘passive’ income I see is starting an online business. Maybe I’m missing something, but starting a business doesn’t sound very passive to me.
These options aren’t bad ways to earn money, but I don’t believe they’re suitable for trying to make passive income with only a daily £4 allowance.
Investing in companies? This form of income is truly passive. My first investment took me maybe 30 seconds to carry out and I haven’t touched it since. Since then I’ve been earning dividends and seeing the share price go up – and sometimes down, of course.
A £25,000 second income?
Let’s assume my £4 a day gives me £120 a month. What I’d do is drip-feed this amount into my investment account and buy shares, which will give me returns via dividend payouts from the companies and — hopefully — from growth in share prices.
I’m going to assume a 10% average return. The historical performance of the FTSE 250 on the London Stock Exchange is around 10% annually going back decades, and the US S&P 500 offers around 10.5%. But it’s important to remember that stocks tend to have good years and bad years, rather than a consistent return. And my long-term return might well be less than 10%.
| £4 a day | With 5% | With 10% | |
| 1 year | £1,440 | £1,479 | £1,517 |
| 5 years | £7,200 | £8,171 | £9,261 |
| 10 years | £14,400 | £18,599 | £24,175 |
| 20 years | £28,800 | £48,895 | £86,878 |
| 30 years | £43,200 | £98,244 | £249,515 |
| 40 years | £57,600 | £178,628 | £671,532 |
By the 30-year mark, each year a 10% return would net me around £25,000 alone. Not too bad from just £4 a day.
I can even make that figure higher or reduce the amount of time it takes to get there. Buying shares in quality companies is one way to improve returns, and it might be possible to invest larger amounts as my career and salary progress.
Spread out the risk
The biggest downside to stocks is the risk of single companies performing poorly. This is inevitable and is the reason why I make sure to diversify via a few carefully chosen companies.
The markets I like to invest in, the US and UK, have a long history of excellent returns for shareholders. So as long as I do my research and spread out the risk, I’m confident I could use £4 a day to build a passive income for life.
