Next year, I’m planning to start saving for a passive income. With an investment of just £100 a month to begin with, I believe I can build an income stream to live off for the long term.
Passive income stream
According to my research, building a passive income stream with stocks and shares is relatively straightforward. All it takes is a fixed investment plan and a bit of patience.
As I noted above, I plan to start my passive income journey with an investment of £100 a month. My calculations show that this sum, invested in the FTSE 100, could help me acquire a financial nest egg worth nearly £19k after 10 years.
This projection is based on historical returns. Specifically, over the past three-and-a-half decades, the FTSE 100 has produced an average annual total return of 8%.
Based on the current FTSE 100 dividend yield of around 4%, this investment of £19,000 would throw off an annual passive income of just £760. Because my expenses currently exceed £1,000 a month, or £12,000 a year, thisn’t going to be enough.
I believe I’ll need to build a savings pot of £300k to produce this level of income. I reckon it’s possible to hit this target with just a few changes to my passive income strategy.
Long-term savings
The first change I’d make is the investment. While the FTSE 100 is an excellent index to buy for long-term growth, the FTSE 250 has a much stronger track record. It has added 12% per annum over the past few decades.
The reason behind the higher return is simple. The FTSE 250 is comprised of smaller growth stocks which tend to outperform their large peers in the long run.
As well as investing in the FTSE 250, I also plan to increase my monthly contributions in the long term. Starting off at £100 a month, I’m looking to improve my contributions by around 15% a year.
Thanks to these two changes, I think it’s possible to build a £300k financial nest egg within 20 years. This would provide a passive income stream of £12,000 a year.
Another 10 years of saving could provide an investment pot worth more than £1m. Invested in the FTSE 100 with a yield of 4%, this could generate an annual passive income of £40,000.
I’m not targeting a £1m pot just yet, but it’s something I might consider at a later date. In the meantime, I plan to use the strategy outlined above to build a passive income stream using stocks and shares.
To hit my monthly target, I plan on setting up a regular direct debit and investment plan with a low-cost online stockbroker. When this plan’s set up, all I need to do is sit back and watch the pot grow.
That’s my straightforward approach to building an impressive passive income stream.