A recent study put the average UK household saving at £180 a month. Putting a couple of hundred away monthly is to be applauded and this level of saving can even lay the groundwork for a lifelong second income.
Creating an income stream from average savings — around £6 a day — sounds like a tall order. But new savings vehicles with low fees and easy-to-use platforms have simplified getting big returns on investments. A passive income stream that lasts for life is easier to achieve than ever, I’d say.
More and more people are targeting this kind of income too. Some 4,000 people have reached £1m in ISAs now with around half of them hitting the figure in the last year alone.
Reaching the million-pound mark given the deposit limits on those accounts is impressive indeed, but such a large nest egg isn’t needed for a life-changing income.
Losing cash
I’ve been working towards something like this myself, and for me, financial security is what appeals most. The State Pension isn’t really enough to live on (and only 38% of under 35s expect to receive it). Plus near-double-digit inflation makes saving in cash look unattractive.
Inflation is a killer for average savers. Our society is built around low levels of inflation, it’s true. While keeping cash circulating benefits an economy, it hurts savers who see their cash lose value constantly.
Even single-digit levels of inflation can be devastating. A 5% inflation rate means prices double after just 14 years. In other words, a £3 sandwich becomes £6. Perhaps more pertinently, £1,000 of savings will have the buying power of £500.
While current inflation levels are unusually high, whichever way you slice it, all of us are seeing our cash being worth less and less. And with money losing value, I see inflation-beating investments as a no-brainer.
Let’s waste no more time then. On to the strategy. My plan essentially requires two things: a return above inflation and compound interest over decades.
What I’m doing
For inflation-beating returns over years and years, I see no better option than investing in high-quality stocks.
Wait a second! The stock market? Isn’t that risky? Won’t I be competing with bankers working 80-hour weeks and lightning-fast algorithm traders?
Well, the answer is no, for the most part. While the stock market has plenty of high-risk, high-reward gambles, I won’t be touching those. My investing strategy is boring and slow – although the risk can never be fully removed and I may still lose money.
I invest the same way as billionaire Warren Buffett. He doesn’t buy stocks for a few days, but for a few decades. He says his “favourite holding period is forever”.
Slow and steady
By looking long term, I can enjoy the inflation-busting effect of stock market returns while avoiding the erratic ups and downs of day-to-day share price moves.
Better still, £180 a month is more than enough to dip my toe in the water. These days, fees to buy stocks are only a few pounds with modern platforms like Hargreaves Lansdown or AJ Bell that make it simple for anyone to invest.
And as for picking the stocks? Well, the Foolish musings of this very website are as good a starting point as any!
