Time and again it’s been proven that share investors don’t need to spend a fortune to generate a healthy passive income for life. Here’s how setting aside just several pounds a day to invest in UK shares could significantly boost my wealth.
Compounding miracles
Legend has it that Albert Einstein once claimed that, “compound interest is the most powerful force in the universe”.
As an investor and a market commentator, I’ve seen how it can significantly boost the returns that UK share investors receive. So I can understand why one of the greatest scientific minds of all time was so enthusiastic about it.
Compounding basically involves reinvesting any capital gains or interest that an investor receives from owning an asset. Doing this allows an individual to make additional earnings, as they make gains on the interest they’ve reinvested as well as on the original asset.
Over a long period of time, this mathematical miracle means investors can make a lot of money from a relatively modest initial investment. I’ll now show you how this works in practice.
How to make £307,622!
Let us say that I have £50 spare each week to invest in UK shares. That works out at roughly £217 a month.
Past stock market performance shows that investing in equities provides an average 8% annual return over the long term. So what would that 200-odd-pounds regularly invested look like in my bank account?
Punching these figures into an online compound calculator shows that, over a 30-year period, that £217 per month could make me an enormous £307,622!
Breaking this down further shows the huge impact that compounding can have. Over those three decades I’d have only invested £78,120. The remaining £229,502 would come from the benefits of compound interest.
You can see why Einstein (at least reportedly) said of compound interest that “he who understands it, earns it. He who doesn’t, pays it”.
Next: creating passive income
Next, let me illustrate how that huge nest egg could help me earn a terrific passive income.
I’ll assume that after those 30 years I decide to stop reinvesting and instead use the dividends I receive to earn income. If I put that £302,622 to work with dividend stocks that yield 5%, I could end up with an annual passive income of £15,131.
Life-changing returns
This is why I love trying to create an additional income with UK shares. I can make life-changing sums with a relatively small initial investment.
As in life, there’s no such thing as guaranteed success when it comes to investing. I have to accept the possibility that the eventual returns I make could disappoint. But history shows us that buying stocks can deliver the sort of long-term rate of return that can provide a healthy second regular income.