Setting up passive income streams does not always require a lot of time or money. By saving a small amount regularly and investing it in shares, I could start to benefit from the dividends they pay. Here, in three steps, is a passive income plan I could use with £5 a day.
1. Saving what I can
Critical to this plan is the discipline of saving. That does not need to involve a lot of money. But if I make the effort to save a set amount on a consistent basis, I feel I am more likely to stick to my plan. I am also less likely to notice having £5 less a day to spend on other things than if I set aside a much bigger amount of money once a month.
I could physically save the money in a piggy bank, or set up a regular bank transfer. But getting into the habit of regular, disciplined saving will form the foundation of my passive income plan.
2. Choosing shares to buy
To generate income, I will invest the money into shares. This can be a confusing area – what sort of shares should I buy?
The answers may well be different for me than for another investor. But I think a couple of principles are worth bearing in mind.
First, to pay dividends in future, a company needs a business that can generate excess free cash flow. Some companies have proved they can do this, such as BP, Unilever and British American Tobacco. Other shares such as Tesla may seem to have good business prospects but I think are unlikely to pay dividends in the near future. With my focus on passive income, I would select companies I thought likely to have the means to pay out chunky dividends.
But I could be wrong about the choices I make. For example, if the oil price crashes, BP might suspend its dividend. If Tesla’s sales boom, it could become consistently profitable and start paying dividends. So although I would spend time trying to identify the shares that match my objectives, I would diversify my choices across a range of companies and business areas. That reduces my risk if some of them do worse than I hope.
3. Passive income plan in action
My final step would be to start using my £5 a day savings to buy some of the shares I have chosen.
£5 a day would add up to £1,825 in a year. If I chose shares that paid dividends of around 4% of the share price when I bought them, that would add up to £73 a year of passive income from the shares I purchased in the first year. If I kept going, I could buy more shares in the next year. Hopefully I would earn dividends from them, as well as still getting income from the shares I had already bought.
To earn any money, though, I would need to turn my passive income plan into action. To be successful, a plan needs action!