How I’d use £4 a day to earn passive income for life

Today, a four pound coin would hardly buy me a meal or a beer in the pub. But I think that if I invest that amount every day then it can lead to a surprisingly large nest egg, one that can give me passive income for life.

The key to building this source of income is investing in stocks and shares. I’ve been trying to do something like this, but suppose I had to start over with just £4 a day. Here’s how I would do it.

The key to strategy

If I only have £4 a day to start with, then there are few options. Buying a property, for example, requires an upfront deposit. Also, I want passive income, so I don’t like to be on the phone late at night because the roof is falling or the boiler is packed.

Another form of ‘passive’ income I’ve seen is starting an online business. Maybe I’m missing something, but starting a business doesn’t sound too passive to me.

This option is not a bad way to earn money, but I don’t believe it is worth trying to earn a passive income with only an allowance of £4 a day.

Invest in a company? This form of income is completely passive. My first investment took me 30 seconds to do and I haven’t touched it since. Since then I have received dividends and watched the share price go up – and sometimes down, of course.

Double your £25,000 income?

Let’s assume £4 a day gives you £120 a month. What I will do is drip-feed this amount into an investment account and buy shares, which will give me back through dividend payments from the company and – hopefully – from growth in stock prices.

I will assume an average return of 10%. Historical performance of FTSE 250 at London Stock Exchange it is about 10% per year return decade, and the US S&P 500 offers around 10.5%. But it’s important to remember that stocks tend to have good years and bad years, rather than consistent returns. And long-term returns may be less than 10%.

By the 30-year mark, an annual return of 10% would net me around £25,000 alone. Not too bad from just £4 a day.

I can even make a higher figure or reduce the amount of time it takes to get there. Buying shares in quality companies is one way to increase your returns, and it is possible to invest larger amounts as your career and salary progress.

Spread the risk

The biggest downside to stocks is the risk of a single company doing poorly. This is inevitable and is the reason why I diversify through a few carefully selected companies.

The markets I like to invest in, the US and the UK, have a long history of being very good for shareholders. So, as long as I do my research and spread the risk, I believe I can use £4 a day to make passive income for life.