The thought of generating passive income can seem daunting. But this isn’t the case for me. Why? Well, I’m opting for what I think is the simplest route — investing in the stock market.
Generating some extra cash will provide me with an extra layer of financial security later in life. And while this may seem unachievable, it in fact can be done with very little extra work.
With just £5 a day, here are the steps I’d take today to hopefully generate over £11,000 a year in passive income.
What to consider
Before we delve into the numbers, let’s start by laying out some of the most important things I’d have to take into consideration.
First, I’d have to invest on a consistent basis. Life is full of surprises and a lot of the time financial plans can be derailed due to unexpected costs. However, by sacrificing £5 a day (be it by cutting down on buying lunch out or a coffee), I’m confident I’d be able to build a substantial nest egg.
By doing this, I’d also benefit from ‘pound cost averaging’, which is investing the same amount of money into a stock at regular intervals regardless of its price. The stock market is volatile and share prices fluctuate. But by remaining consistent with my investing, I’d reduce the impact of volatility on my portfolio. Another benefit is that I wouldn’t be trying to time the market.
Where to invest
So, where am I going to invest my money?
That’s where the FTSE 100 comes in. In my opinion, it’s the best place for investors to start. The UK’s leading index is full to the brim with high-quality companies. Many of the businesses in the Footsie are household names.
On top of that, it also has some very enticing dividend yields. For example, the highest payer is Vodafone, which provides investors with nearly a 12% yield!
I like to select shares that offer a yield above the index’s average of 4%. Of these, I own names such as Legal & General, Lloyds, and British American Tobacco.
Within the Footsie, I’d diversify my investments across a host of industries as this would lower my risk. I hold a number of companies in the financial sector, but high inflation and interest rates may make these shares prone to volatility. Therefore, I also own companies in sectors such as technology.
My plan in action
So, the plan is to invest consistently in high-quality stocks across a host of sectors. But how much can I make?
Well, £5 a day equates to £35 a week or £1,820 a year. With an average return of 7%, after 10 years I’d be earning close to £1,600 a year in passive income. Not bad. However, I plan to invest for longer than that to benefit from compounding. This way, I earn interest on my returns as well as the money I put in.
With a 30-year timeframe, by year 30 I’d be making £11,050 a year in passive income. What’s more, my pot would be worth over £165,000. That’s more like it.
Of course, a 7% return is never guaranteed. Yet by selecting the right companies, I’m confident I could reach it. £11,000 a year in passive income would really help my retirement.
