It’s possible to build a future passive income by investing as little as £25 a week.
But investing what may seem like a small amount could lead to a meaningful income later. Of course, there are many ways to build passive income. But my preferred option is to buy stocks, shares and instruments backed by equities, such as funds.
Work/life balance
For me, it’s important that the building stage is as passive as it can be as well. I’m not keen on the idea of rolling up my sleeves and working too hard to build my income streams.
One reason for that is I want to keep a healthy work/life balance. And for me that means the life outweighing the work. But another reason is the often quoted wisdom that hard work alone is unlikely to make us rich. It’s often far more productive to aim to work smart.
And investing in stocks and shares can be smart if it’s done sensibly. It’s also possible to approach the activity with less hands-on effort than other ways of building passive income. For example, owning and renting out property, which can lead to lots of work.
Indeed, with stock-backed investments and a balanced approach to risk, it’s possible to harness the power of compounded gains. And that means allowing the businesses behind shares to do the heavy lifting when it comes to building wealth.
But it may seem like a risky time to invest in the stock market with all the current uncertainties in the world. However, billionaire investor Warren Buffett pointed out that America’s broad S&P 500 index of stocks has achieved annualised gains of around 10% a year for decades. And his advice to most investors is to simply invest regularly in a tracker fund that follows the market, whatever share prices are doing. And to then let time work its magic on the process of compounding.
A spread of investments
I think that’s a wise strategy and it’s part of my own investment routine. I put money into a range of low-cost, index tracker funds every month. For example, I’m investing in trackers following the FTSE 100, the FTSE 250 and small-cap indices in the UK. And I’m investing in the S&P 500 and small-cap indices in the US as well as others covering emerging markets around the world.
But to make sure the process of compounding is under way, I’ve also chosen the accumulation version of my funds. And that ensures dividend income is automatically reinvested into the trackers. One day I’ll want to switch to the income versions of the funds and begin to harvest passive income, but that’s for later. Right now, I’m interested in building my fund.
I’m also investing in the shares of selected individual companies with the aim of generating higher returns. Although outcomes are never certain on the stock market and I may not achieve higher returns in reality. But although I choose to work a bit harder and invest in individual stocks, it isn’t essential for aiming to build a passive income with £25 a week. Tracker funds will likely serve me fine over time, just as Warren Buffett recommended.
Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
