Here’s my £5-a-day passive income plan!

Young black colleagues high-fiving each other at work

Image source: Getty Images

Generating passive income offers investors the opportunity to make some extra cash with very little extra work. And while this may seem unachievable, it’s more than doable.

Red hot inflation has squeezed consumer’s pockets. Yet despite this, investing small amounts over a long period of time can see funds build up.

With just £5 a day, here are the steps I’d take today to create passive income streams that could serve me in the times ahead.

Remaining consistent

Let’s start with the most important of them all. And that’s investing on a consistent basis.

It’s easy for financial plans to come off track with unexpected costs arising. But by sacrificing just £5 a day, be it by cutting down on buying a coffee or lunch, I’m confident I’d be able to build a sizeable pot.

This equates to £35 a week, or £1,820 a year. With an annual average return of 13% (the average FTSE 100 annual return since its inception plus dividends), this would see me earn around £2,000 in interest after five years.

However, by continuing to invest over a longer time frame, I’d be able to experience the power of compounding.

If I keep on with my consistent investing over a 30-year period, I’d have earned over £360,000 from my investments. What’s more, my pot would be worth over £400,000!

Targeting the right stocks

Secondly, to enhance my chances of achieving this, I’d have to target high-quality companies that I see rewarding me in the years ahead. And while this may sound difficult, the FTSE 100 is a great place for investors to begin.

It’s home to a host of companies that provide meaty dividend yields. As I write, there are 10 firms offering yields higher than the current UK inflation rate.

Included in these, I already hold the likes of Legal & General and British American Tobacco. I’ve also been paying close attention to Taylor Wimpey of late.

There are other businesses that offer yields lower than the current inflation rate, but still above the Index’s average of around 4%. Of these, I own names including Lloyds, which yields around 5.7%.

A further step I’d take would be to spread my investments across a host of industries within the index. For example, while I’m a fan of stocks within the financial sector, investing solely in these leaves me prone to any downturns in the industry. By diversifying my cash across industries, I’d lower my risk.

Topping up my returns

Finally, there are steps I could take along the way to help me achieve my financial goals quicker.

For example, I’d look to put any excess cash I may have at the end of every month into my pot. And while at the time it may seem insignificant, as time passes it will most certainly make a difference.

My move

Of course, there are risks involved.

The stock market is volatile. And returns are not always guaranteed. Unexpected events, such as the pandemic, can have detrimental impacts on the market. Furthermore, dividends can be slashed or cut at any time by a business.

However, by adopting the methods above, I’m confident I could build a passive income that would serve me in the times ahead.