I’m fairly confident that with £100 a month, I could build passive income streams that would be able to serve me well in the years ahead.
As a Fool, I know that starting today to secure my financial well-being in 30 years’ time is a smart move. And as a 20-something, I have time on my side.
I’ve never been a believer in the view that we need a large amount of capital to start building passive income. Instead, I believe that if we start early and are consistent, we put ourselves in a pretty strong position to build a sizeable investment pot.
With that, here’s my plan.
Consistency
The key to my plan is consistency. By sacrificing £100 a month of my income to invest, over a 30-year timeframe, my pot should grow significantly.
For example, with a 6% average annual return, £1,200 a year after five years would earn me around £1,000 in interest. And my investment would be sitting at £7,000.
However, fast forward to year 30, and with the power of compounding, I’d have made around £65,000 in interest, with my balance sitting at £100,000. A lump sum that size would most certainly help with my retirement.
What’s more, I could invest a greater proportion of my income should I have any extra spare cash. For example, if I were to invest £150 a month, this would leave me with over £150,000 after 30 years. This shows that while an extra £50 a month may not seem like a lot, over time it builds up.
Target the best
To help me achieve my goals, I’d also have to target high-quality companies that provide stable and sizeable dividend yields.
Now, this may sound challenging. But among FTSE 100 constituents, there are many stocks that fit the bill.
This year, it’s forecast that the Footsie will pay out nearly £80bn to shareholders via dividends. And as I write, there are 17 companies that offer yields of 6% or more.
Of these, I own Legal & General and British American Tobacco, which yield 9.4% and 9.3%, respectively.
Ready to act
The final factor I’d have to consider is being alert. By this, I mean that when opportunities arise in the stock market, I must be ready to act. By doing this, I’d be able to buy blue-chip stocks for a cut-down price. The volatility we’ve seen in the last few years is a prime example.
As renowned investor Warren Buffett said: “Be greedy when others are fearful.” He followed his own advice in the financial crash of 2008, sweeping up an array of stocks for slashed prices. He’s seen some pretty handsome gains since.
Final comments
It’s worth noting that dividends can be reduced or cut altogether by a business at any time. Furthermore, a 6% return isn’t always guaranteed. However, by doing my due diligence, I’m fairly confident that by picking the correct stocks and giving myself enough time, I could see some healthy returns.
