Being able to live off a passive income from your investments might seem like an unrealistic dream at first. However, I think this goal really is possible with just a small monthly contribution of £5 a day, even if you’ve nothing saved to begin with.
Putting money away
There’s no getting around the fact that if you want to generate a passive income from your investments, you are going to need to have a strict savings plan in place.
Unless you’ve a large savings pot to begin with, it could take several decades to accumulate the money initially required to throw off an acceptable level of passive income.
Indeed, I calculate that £5 a day, or £1,825 a year, would be the minimum required to build a passive income stream after around three decades of saving.
This is based on the assumption that daily amount is invested in a low-cost FTSE 100 tracker fund, which produces a return of 7% per annum. After three decades of saving, I calculate this pot would be worth £187,000.
If this money is then invested in a high-yield income fund, such as the iShares UK Dividend UCITS ETF (6.7% current yield), it could produce an annual passive income stream of around £12,500.
Disciplined plan
Three decades might seem like a long time to wait, but I believe this example clearly illustrates how straightforward it is to build a passive income stream with a disciplined savings and investment plan.
You don’t need to try and pick stocks or fund managers to make the most of this strategy. All you need to do is make sure you’re saving enough every month and have a regular investment plan in place.
Most online stock brokers offer a monthly plan today, with initial investments starting from as little as £50 a month.
Bigger contributions
If you cannot wait for 30 years, then higher monthly deposits will be required. Putting away £10 a day, or £3,650 a year, would reduce the time it takes to build the £187,000 savings pot to 22 years. With contributions of £20 a day, or £7,300 a year, it would take 14.5 years, and I reckon it would take 11 years with £30 a day.
All of these examples assume the money is invested in a low-cost FTSE 100 tracker fund that produces an average annual return in the region of 7%.
The critical thing to remember here is that the market will do all of the work for you. There’s no need to tinker with your investments every couple of months to try and get the best returns. Doing so could cost you money and set you back on your journey to create a passive income stream from the stock market.
The bottom line
So, that’s how I’d aim to make a passive income with an investment of just £5 a day. If you can afford a larger daily or monthly contribution, then it’s certainly worth doing so because it will dramatically shorten the amount of time you’ll need to save before you can start drawing out money as a passive income stream.