How far does £150 go in a month? A few nights out? Booking a weekend away somewhere? Buying a new piece of kit for a hobby? All of those could be tempting, but I would also be attracted by the possibility to set up passive income streams for the long term by squirreling away my £150 every month in a Stocks and Shares ISA. Here is how I would go about it.
What can I do with £150 a month?
Over a year, saving £150 a month would add up to £1,800. That is a fair bit of money. If I invested it in shares yielding 4% — close to the average for the FTSE 100 – I would hope to generate around £72 of passive income in a year.
In the second year of my passive income plan, I would hopefully buy shares that generate another £72 of passive income annually in future. But I would still own the shares I bought in the first year if I had not sold them. So, over time, putting a steady £150 a month into my Stocks and Shares ISA should let me see my passive income streams increase, as I buy new shares while still getting dividends from ones I bought before.
Why I like shares for passive income
There are a number of ways I could use my £150 a month to earn passive income, such as putting it in a savings account. So why would I invest it in stocks and shares?
When I look at a company like Apple or Tesco, I am excited by the prospects their businesses have in coming years. They have large customer bases and well-established brands that can help support their profit margins. As an investor, I can get some exposure to such companies simply by buying their shares. Both Apple and Tesco pay dividends, so I could aim to earn passive income simply by putting some of my £150 monthly savings into their shares. Hopefully if their businesses perform well in future, that may enable them to raise their dividends – and my passive income.
But even a successful company can face business challenges that hurt its dividends. An accounting scandal at Tesco in 2014 led to it cancelling its dividend completely, for example. The retailer has returned to health and is now paying dividends again. But the moral of the story is that I would reduce my risk by spreading the money in my Stocks and Shares ISA across different companies.
Making a move
Just thinking about what I could do will not earn me any passive income, though. I need to take action.
That can start with the simple move of setting aside £10 a day. I could also set up a Stocks and Shares ISA so I am ready to start buying dividend shares once I have chosen some companies I think could help me meet my investment objectives. Then, I need to start finding out more about shares – and which ones could be the most promising when it comes to my passive income plans.
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Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Apple and Tesco. 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.