One of the easiest ways to save money is to reduce spending. And one of the easiest ways to reduce spending is to reduce purchases of goods and services I can create for a lower cost at home.
Coffee is the perfect example. By having coffee at home rather than in a coffee shop, I estimate that I can save as much as £11.25 a week. Ultimately, I could use this money to create a passive income from a portfolio of stocks and shares.
Passive income from coffee spending
Coffee at my local shop costs around £2.50 a pop. I calculate I can replicate the same product at home for around 25p. That is a saving of £2.25 a day, or just under £11.25 a week, £48.75 a month, or £585 a year.
A figure of £585 is not enough to generate a passive income straight away. However, over the space of a couple of years, it could help me build a diverse portfolio of equities, which have the potential to generate a regular income.
There are plenty of companies on the market with tremendous potential as income investments. Homebuilder Persimmon currently offers a dividend yield of around 8%, and the mining giant Rio Tinto yields approximately 10% (an average for the next two years, based on current forecasts).
A sum of £585 invested across these two companies would potentially generate an annual income of just under £53 per annum. After two years of saving, and assuming I reinvest all of my income from the portfolio, I would have a portfolio worth £1,276.69, generating £54.80 per annum in dividends.
Future growth
When I have put the foundations of my passive income strategy in place using the above approach, I can start focusing on growing my balance. There are a couple of techniques I can use to meet this aim.
Of course, I can save more. This is the easiest way to increase my savings and investment pot. If I can put away an extra £10 a week, or £520 a year, my savings pot would be worth £2,313.66 after two years. That would give me the potential to earn £103 a year in passive income, assuming I continue to invest in the corporations outlined above.
The other strategy is to invest more in growth stocks rather than income plays. Using this approach, I might be able to earn a higher return on my money above 9%, although it is far from guaranteed. There is even a chance I could end up losing money, which is not something I really want to do.
On the topic of risks, when investing in dividend stocks, there will always be a risk the companies may cut their distributions to investors. In this scenario, I may have to re-evaluate my investment strategy.
Still, I believe the passive income strategies outlined above can help me generate a recurring income stream with stocks and shares even when taking this challenge into account.