Can I increase my earnings without also having to boost my working hours? I think the answer is yes. I could try a variety of approaches to try and set up such passive income streams. One of my favourites is investing in dividend shares.
I can do that even if I do not have a lot of money upfront. Here is how I would go about that by using just £3 a day.
Saving £3 daily
Putting aside £3 every 24 hours seems achievable to me. That is why I would use this approach as part of my plan. I see no point in coming up with an unrealistic target that I will not be able to achieve in practice. So setting a daily goal that is affordable given my personal financial circumstances makes sense to me.
I would put the money into a share-dealing account or Stocks and Shares ISA. That way, when I have saved enough money and found some shares I think suit my objectives, I would immediately be ready to invest.
Learning about the stock market
Before I begin to choose shares though, I would want to learn more about how the stock market works.
For example, an important principle is valuation. A business can be very profitable, but if its shares are overpriced, it might not be a rewarding investment for me. Another important idea for me to get my head around is dividend yield. That is basically the annual passive income I could expect from a share, expressed as a percentage of the price I pay for it.
Learning about the stock market in general would help me zoom in on some specific dividend shares and decide whether they might be right for me.
Choosing shares to buy
Let me illustrate this with an example. Fast-moving consumer goods firm Reckitt operates in a market I expect to keep seeing strong demand. It owns brands such as Dettol, which give it pricing power. That could help Reckitt make profits and pay dividends.
Its dividend yield is 3%, so if I invested £100 in Reckitt shares today, hopefully I would earn £3 a year in passive income. The company does face risks – for example, cost inflation could hurt profit margins. But I like its business model and think it could make high profits in future.
However, a 3% yield does not excite me that much when other shares I also like offer me a higher yield. Rival Unilever, for example, offers a 3.8% yield currently.
Setting up my passive income streams
I would buy shares in more than one company to reduce the impact on my passive income if any one of them cuts or cancels its dividend in future. That is always a possibility.
As in my example above, I would start by looking for what I thought were great companies at attractive valuations and only then would I zoom in on their dividend yields.
My £3 a day would add up to investment funds of over £1,000 in a year. At an average yield like that of Unilever, that ought to generate around £41 per year for me in passive income. If I kept saving, I could hopefully grow that amount over time. But more immediately, I need to start!