Good ideas do not always need to be complicated or require a lot of work. While some people pour lots of time and effort into wacky schemes to set up passive income streams, my own approach is fairly simple. I save money and invest it in shares I hope will pay me dividends in future.
I think it is possible to do that by regularly putting aside a fairly modest sum of money. Here are the three steps I would take to start with £30 a week.
1. Put aside money every week
Getting into a habit can take some effort, but I think the discipline of weekly saving can be motivating. That way, when there are other demands on my cash, I think I am more likely to stick to my plan.
I would set up a regular bank transfer, or get into the habit of physically saving £30 in cash on the same day each week. When it comes to setting up passive income streams, I think a lot of people fall at this first hurdle simply because they do not turn their plans into action.
2. Learn about dividend shares as passive income streams
If putting aside £30 a week, it would take some time before I had a big enough sum of money saved up to make me feel it was worthwhile to start investing.
I would use this time to learn more about how the stock market works. I would want to understand what sorts of dividend shares might suit my objective to set up passive income streams. For example, would it suit me better to invest in a company with a high dividend yield like Imperial Brands, or should I focus on a lower-yielding company with a history of increasing its payout, such as Diageo?
If I think a company has a good business model – like Games Workshop – does that also make it an attractive investment for me? After all, there is a difference between a good business and a good investment.
And should I take my dividends out as cash, or reinvest them?
All such questions could turn out to make a big difference to the performance of my investments. So I would want to learn more to help me understand better the shares that could hopefully offer me what I want. Knowledge is power.
3. Starting to buy shares
Once I had saved up enough money and chosen some shares to buy, I would start investing. No matter how good one dividend share might seem to me, I would be sure to diversify my portfolio across different companies and fields of business. That is because all shares have risks. By spreading my investments, I would reduce the impact on my passive income of any one share’s underperformance.
£30 a week adds up to £1,560 a year. If I invest in shares with an average dividend yield of 5%, that should earn me around £78 a year in passive income. It may seem like a small start – but it is just a start. Over time, with action and discipline, hopefully I could increase my passive income streams.
Christopher Ruane owns shares in Imperial Brands. The Motley Fool UK has recommended Diageo, Games Workshop, and Imperial Brands. 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.
