No savings in 2023? Here’s how I’d start building passive income

2023 looks set to be a tough year for the cost of living. Having a passive income stream to supplement my income would definitely appeal.

In this article, I’ll explain how to start making passive income today – including some investments you can choose from.

Start

Unfortunately, there is no escaping the fact that it takes money to get started.

This means that the first thing I will do is determine how much I can save. As a self-employed person, I will try to make the usual amount every month. But lump sum sometimes works well too.

The next step I would like to take is to open a cash savings account, if I don’t already have one. I would never start investing in the stock market before I have a cash emergency fund. I want three to six months of living expenses.

The good news is that interest rates of 3% or more are available to savers today. So, you can generate passive income and make savings at the same time.

A rate of 3% will provide an income of £30 per year for every £1,000 saved.

Stock market funds

I would build an emergency fund (and pay off my credit card) before I start investing in the stock market. Stocks and funds can rise and fall in value unpredictably. Selling at the wrong time runs the risk of locking in short-term losses.

Last year, for example, the UK’s FTSE 100 index fell 10% on two occasions, before bouncing back shortly afterwards.

If I had up to £100 a month to invest, I probably wouldn’t invest directly in individual stocks. Even if I use an app-based challenger broker with no dealing fees, I’ll have a hard time building a balanced and diversified portfolio.

Instead, I will invest my money every month in a fund tracking the FTSE 100 index. I chose the FTSE because it has a higher forecast dividend yield (3.9%) than any other major index today.

This will help me maximize the money I get from my investment.

Invest directly in stocks

By carefully selecting a portfolio of high yielding stocks, it is usually possible to generate higher returns than the FTSE 100 can provide.

If I have a little money to invest every month, I would like to create a portfolio of 15-20 stocks, spread across different market sectors.

Here are some examples of well-known names that I can buy. I’ve put each stock’s dividend yield forecast along with the company name:

• Tesco (4.4%)
• Aviva (7.7%)
• NatWest (5.9%)
• National Grid (5.6%)
• Schroders (4.9%)

A few other companies I can think of belong to the packaging group DS Smith (5.2%), tobacco group Imperial brand (7.3%) and pharmaceutical group GSK (4.0%).

Of course, investing directly in companies carries extra risk compared to index funds. If one of my companies goes into serious trouble, the loss of my portfolio may be greater than that of the fund.

However, in my experience, focusing on large, established and profitable businesses helps manage these risks.

This is the approach I would take if I wanted to start making passive income today.