My 2022 passive income plan using £50 a month

Every year, millions of people plan to generate passive income one way or another. But good intentions might not always lead to action. Looking ahead, I think it’s possible for me to start generating passive income in 2022 by putting aside £50 each month. In three easy steps, here’s my plan.

1. Get into a regular habit

What separates all the people who merely hope to start generating passive income each year from those who actually do? I think the answer may be surprisingly simple in some cases: the doers are the ones who take some action.

That doesn’t have to be a big thing. Indeed, it could be as simple as setting up a Stocks and Shares ISA along with a standing order to transfer a certain amount into it each month. If I did that, I would be putting £50 aside each month to help me develop passive income streams, without even needing to think about it.

2. Choosing dividend shares for passive income

Having money in my ISA is an important first step towards generating passive income. But if it’s a Stocks and Shares ISA, the real passive income potential will only be realised once I put it to use buying shares.

For that I would focus on ‘dividend shares’. Those are not a separate class of shares — the term simply applies to shares of companies that pay out a dividend to shareholders. That includes many popular companies such as Unilever, BP, United Utilities, and Lloyds.

Dividends are usually declared when a company’s business results give it enough surplus profits to pay them. So I would make sure of two things. First, I would look for companies where I thought future free cash flows would likely be enough to pay what I think is an attractive dividend. Secondly, I would diversify by investing in more than one company. That would reduce my risk if a dividend share turns out to generate less passive income than I initially hoped.

With £50 a month, it would probably take a few months before I had saved up a decent amount of money to make my first purchase. During that time, I would keep on paying the £50 regularly into my ISA each month. I’d also take time to research dividend shares that met my risk profile and investment objectives. There are lots of ideas for dividend shares that might work for me. But different investors have varying objectives, risk tolerance, and knowledge. I’d want to focus on investing in dividend shares I understood myself. I could use the few months before my first share purchase to research what some such shares might be.

3. Take action

I wouldn’t rush into buying dividend shares for my ISA. I’d be happy to wait until I found some I really felt were right for me, knowing the monthly £50 was growing my investment pile meanwhile.

But then when I did find different shares I liked, over time I would use my saved funds to buy them. By the end of 2022, I would hope to receive my first passive income. Hopefully, if I just stuck to my plan, that could continue year after year and indeed grow over time.

Christopher Ruane owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group and Unilever. 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.