Earning a passive income has long been a popular financial goal. But now that inflation’s sent the cost of living through the roof, having a second income stream has become a necessity for many British households.
Fortunately, investing, while not risk-free, offers a path to earning some extra cash each month with relatively little effort. And thanks to innovations within the financial sector, starting a portfolio in 2024 doesn’t take that much money either.
1. Start saving
To buy shares, investors first need some money in the bank. While having hundred of pounds s to spare each month would be ideal, putting aside as little as £20 a week is more than enough to get the ball rolling. And with a bit of frugality, like skipping a morning coffee or cancelling a rarely used subscription, finding this small sum shouldn’t be too challenging, even for lower-income households.
After two months, around £160 should have accumulated. And by being smart with a high-interest savings account that pays monthly, there will be a little extra to enjoy as well.
2. Start researching
While capital accumulates and interest in the bank is earned, investors should spend time researching opportunities.
A common tactic is to see what stocks everyone else is buying. Yet, sadly, that seldom generates meaningful returns. Lloyds (LSE:LLOY) is a perfect example of this. The banking giant sees enormous trading activity as both individual and institutional investors keep topping up their positions. Yet zooming out reveals some pretty abysmal performances.
Unfavourable operating conditions can largely explain the lack of returns. After all, until recently, interest rates were near zero, making it difficult for Lloyds to profit from its core lending activities. Today, the situation’s a bit different, and profits have finally started to climb meaningfully.
However, whether the firm can maintain this upward trajectory remains unclear. Interest rates have started dropping again, but most of the gains in the latest results actually came from investments rather than customer loans. In other words, Lloyds is highly dependent on the performance of financial markets, which, as we’ve recently seen, can be quite fickle.
3. Invest in quality
Once a top-notch business has been identified, all that’s left is to buy some shares and hold them for the long run. But it’s not just about finding one terrific company. Investors should seek a broad range of quality enterprises to benefit from the risk-reduction advantages of diversification.
4. Watch the money come in
Depending on the company, dividends might be paid each quarter, every six months, or once a year. Regardless, by simply holding shares in terrific businesses, the money will hopefully roll in (although gains aren’t guaranteed). And for those who don’t need it straight away, reinvesting any dividends received can boost the next dividend payment even higher.
5. Review regularly
Sadly, investors can’t just stick their heads in the sand. Companies are constantly evolving, and not always for the better. It’s important to keep tabs on the developments of portfolio positions and the industries they operate in. That will help identify any potential threats early or perhaps reveal even bigger opportunities.
It will take some time to build a £500 monthly passive income when starting from scratch. But by keeping risk in check, it’s a goal that even small investors can achieve.
This post was originally published on Motley Fool
