Passive income is money you earn without having to work for it.
Some people try to make passive income by starting an online business or buying a property to rent out. Another way to do this, even with a small amount of money, is by buying shares in big, reliable companies that pay dividends.
You don’t need a lot of money to get started. Here’s how I plan to build income streams next year (and in the years ahead) with just £3 a day.
Saving Regularly Can Add Up
£3 a day might not seem like much. Many people might not even notice if they spent £3 less each day.
But if you keep saving little amounts over time, it can grow into something bigger.
If you save £3 every day for a year, you would have £1,085 to invest. Over 10 years, you could have more than £10,000 to put into the stock market.
But that’s just the start.
To earn passive income, I want to buy shares in companies that will pay me dividends. The goal is to grow this income by reinvesting the dividends, a method called compounding.
How Compounding Helps Build Income
Let me show you how it works.
Let’s say an investor puts their money into shares that pay a 7% dividend yield. This means for every £100 they invest, they would earn £7 in dividends each year.
If the investor keeps reinvesting the dividends for 10 years while continuing to save £3 a day, their portfolio would grow to about £15,800 after 10 years.
After 10 years, if they stopped reinvesting and started taking the dividends as cash, they could earn around £1,100 a year in passive income.
Choosing Shares to Buy
Next year, I’ll be looking for good companies with strong share prices that can make enough money to pay big dividends.
One example of a company I bought this year is Legal & General (LSE: LGEN).
Legal & General is a well-known company with a colorful umbrella logo. I think this brand identity helps them attract and keep customers. The company works in the big market of retirement services, which gives them a competitive edge.
This helps the company set good prices, which leads to higher profits. Legal & General is a good cash generator, and its current dividend yield is 9.3%.
However, if the market crashes and people take out their money, the company’s profits could drop. There’s a risk that Legal & General might lower its dividend, as it did during the 2008 financial crisis.
Getting Started for the Long Term
Legal & General’s dividend yield is much higher than the average of 3.6% for FTSE 100 companies.
If I can buy shares with an average dividend yield of 7% and reinvest the dividends, after 10 years, my portfolio could generate £767 per year in passive income.
Where will I put my £3 a day to start? I’ll use a share-dealing account, a Stocks and Shares ISA, or my SIPP (Self-Invested Personal Pension).
