Even though I’m younger than 40, I’m aware that life throws all of us curveballs. Who knows what my financial position could be by the time I hit that milestone? Yet for investors who have hit 40 with no savings, it’s not the end of the world at all. Here’s how it’s possible to invest in stocks to build up a healthy level of monthly income in the future.
Finding the cash to start
To begin with, it’s important to address how to flip from saving nothing to investing something. There are two ways to generate some cash for investing. One is reducing spending, meaning that even with the same level of income, more money will be left over at the end of the month.
The other option is to take on more work to increase income levels. I appreciate that this is much easier said than done, but does remain a viable way of providing extra cash to put towards the future.
It doesn’t matter how much can be saved to begin with. As long as the habit of saving and investing money each month becomes the norm, the foundation can be built on.
Building momentum over time
From a timing perspective, £500 in monthly income would be a great goal to enjoy at retirement age of 65. At age 40, it gives an investor a 25-year period to achieve this aim.
This is important to focus on, as it means investors don’t need to take on a high level of risk when buying stocks to try and get-rich-quick. Patience and a long-term investing approach is much wiser!
Assuming someone saves £150 a month to begin with, I’m going to factor in a 20% annual increase. So after the first year, the assumption is for a £180 monthly saving and so on. When this reaches £375 a month in year six, perhaps that’s time to stop increasing it.
The final cog in the machine to see if the goal is realistic is factoring in an average dividend yield. The FTSE 100 average yield is currently 3.66%. But remember, Footsie stocks’ yields vary widely and there are nine in the index with a yield of less than 1%. By actively picking stocks instead, I’m going to focus on an average yield of 6%.
Turning nothing into something
Putting this all together, an investor could hit their target of making £500 in monthly income after 16 years. Not only could this provide a savings pot worth £100k, but also a passive income stream even before hitting retirement age.
There are risks to be aware of. It might take longer to achieve the goal if an investor can’t grow the savings over time. Another concern could be from holding a stock that cuts the dividend at some point in the future. Finally, a 6% yield might be obtainable now but not with fresh cash years down the line. This drag could again make it longer to reach the end destination.
That said, I do believe that a regular savings and investment plan really could yield rich rewards for years to come.
This post was originally published on Motley Fool
