For me, investing is the very best way to earn a passive income.
Buy-to-let is a popular option, but the returns aren’t what they used to be. Plus it’s rarely truly passive.
I’ve got to be honest too, I’m not a fan of buy-to-let from a moral perspective either.
Instead, investing allows me to generate strong returns without taking a leveraged position.
It’s also much easier to get my money in and out. Buying and selling a house can take months — I should know, I’ve been buying one since September.
Investing with regular savings
I don’t have to start investing with substantial starting capital. Instead, I can look to make regular contributions, starting from as little as £50 a month.
Today I’m looking at how I could build wealth and eventually earn a passive income with £600 a month. That might sound like quite a lot for one person.
However, this could equally represent a regular contributions of a couple — £300 each. Given many platforms have transaction charges, it may be beneficial to for a couple to invest as a couple in order to build a single diversified portfolio.
Investing versus savings
Returns compound over time. That’s a really important thing to remember.
When investing, I personally look to achieve around 12% annually. But if I left it in my savings account, I’d only get 2%.
In turn, this means after a year of investing, I could turn £1,000 into £1,120. But in my savings account that’d be £1,020.
It might sound like a lot of risk or faffing around for just £100. But as I noted, returns compound over time, meaning I’ll be earnings interest on my interest.
Compounding for glory
Compound returns result from reinvesting earnings, creating a snowball effect.
By consistently contributing to an investment, I can amplify the potential for wealth growth.
The initial investment earns returns, and these returns, in turn, generate more returns.
Over time, this compounding accelerates, significantly increasing the overall value of my investment.
It’s a powerful force for wealth accumulation through the multiplication of returns on both the principal and accumulated earnings.
Investing wisely means, in part, following Warren Buffett’s first rule: “Never lose money.” It entails thorough research, assessing risks, and choosing fundamentally strong companies.
It also involves diversification and aligning investments with long-term goals. Buffett’s principle underscores the importance of prudent decision-making to minimise risks and foster sustained growth.
The thing is, many novice investors don’t follow this principle. And if I lose 50%, I’ve got to gain 100% to get back to where I started.
The end goal
If I invest £600 a month for 30 years, and achieve an annualised return of 10%, I’d have £1.36m. That’s quite the result.
At this moment, I could put all my money in dividend-paying stocks and receive something in the region of 8% at the high end.
This would involve investing in companies like Legal & General and Phoenix Group. However, that reflects the current market. There’s no guarantee I could do the same in 30 years.
Nonetheless, for the purpose of this example, if I had £1.36m invested in stocks paying an 8% yield, I receive £108,800 per year without having to touch the principal.