Like a lot of people, the idea of earning money without working hard for it appeals to me. But unlike some people, I have actually turned a passive income plan into action!
My approach is based on buying shares that pay dividends. If I had £30 a week to use on such a scheme, this is how I would go about it.
Step one: get into a regular saving habit
While £30 might not sound like a huge sum, it could soon add up. In a year, saving that much would add up to £1,560.
But to reach that level, I would need to stick with my habit. The idea of a passive income plan can sound exciting in the beginning, but it takes discipline to keep saving regularly even when other financial demands rear their heads.
That is why I would focus on saving often and at a level I reckoned I could manage. An alternative approach would be to just set aside what spare money I had at the end of every month. But I think that, without targets, I might end up saving nothing sometimes and forgetting to start again when I had money once more. That is why I would target a regular weekly saving of a set amount.
Step two: find shares to buy
As the money started to add up, I could spend time learning about the stock market and understanding what sort of shares might suit my investment objectives.
To pay dividends, a company needs to have spare money. So I would look for businesses I reckoned might make profits in future. That is different to finding ones that are doing well today. How can a company make profits? Well, it needs some sort of product or service that is likely to stay in high demand and that it can sell profitably.
That approach explains why some of the shares I own to try and earn passive income, like M&G and Lloyds, are in fairly unexciting industries. Although they might not have hot growth stories, I expect customer demand for what they do to remain high. They also know how to make a profit doing it, as they have already proven.
But no matter how careful my research, I could still be wrong. A company may meet some unexpected difficulty, for example, that means it stops paying dividends. After all, dividends are never guaranteed. So I would spread my investment pot across a range of firms.
Step three: start earning from my passive income plan
Once I had saved enough funds and identified the sorts of shares I felt matched my needs, I could start buying shares. That would hopefully mean I begin to receive dividend income.
The income may be modest in the beginning. If I bought shares with a 5% dividend yield, for example, my first year’s savings of £1,560 would hopefully earn me £78 of annual dividend income. But over time, hopefully the results from my passive income plan would grow. I would keep saving £30 a week, and using it to grow my income-generating share portfolio.