Let’s say I had zero savings but wanted a passive income. In other words, to create from scratch an income stream of £1,000, £2,000, or £3,000 or more each month to withdraw year after year without the risk of my money running out. Well, I’d need a plan to get there.
My first step is to save some cash. A daily £30 is an excellent base to build net worth. But even just £3 a day – not enough for a flat white at my local coffee shop anymore – could create an income most wouldn’t sniff at.
Both plans are similar, but the differences that do exist are vast. Starting from £3 a day or £30 a day could shave decades off the time spent building income, or be worth millions of pounds in the final calculation – as we’re about to find out.
How to build wealth
So how do we build wealth from these savings? In both cases, I see putting the money to work in the stock market as the best option by far.
For one, I won’t need to save a minimum amount to get started – unlike the toil of saving up for a house deposit. And second, even the smallest DIY investors have a mostly even playing field with those throwing millions around.
The risks are the same for £3 and £30 too. However much I invest, stocks can go up or down, even stagnate for years. Personally? I feel the higher possible reward is worth the higher risk, but growing money this way might not be for everyone.
Now, the yearly amount I’m putting away is £1,095 on the smaller plan and £10,950 on the larger plan.
Little differences
In both cases, this falls under the generous tax allowance of the Stocks and Shares ISA. So long as I put in less than £20k per year, I get a lifetime exemption from taxes – sometimes as high as 39%!
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
While I can swerve the taxman as I accumulate cash, I can’t pull the same trick with fees. And the few pounds it costs to make a trade poses a problem for smaller savers.
If I open my ISA through Hargreaves Lansdown, for example, I might pay £5.95 per trade. This fee skims 6% off a £100 trade but only 0.6% off a £1,000 trade. With a smaller saving rate, I should avoid making a trade too tiny.
The other notable difference is how fast the cash accumulates. While £3 a day can aim for a beefy passive income, it will either take longer or be significantly less than saving £30 a day.
Here are a few example plans assuming a 10% yearly return on investment and a 4% yearly withdrawal.
£3 a day
4% withdrawal
£30 a day
4% withdrawal
1 year
£1,205
£48
£12,045
£482
5 years
£7,354
£294
£73,536
£2,941
10 years
£19,197
£768
£191,966
£7,679
20 years
£68,988
£2,760
£689,877
£27,595
30 years
£198,133
£7,925
£1,981,331
£79,253
40 years
£533,103
£21,324
£5,331,027
£213,241
While these numbers look good anyway, there are even ways to bump up the income or bring down the time it takes. While an initial deposit or increased earning power as I age can help, the biggest one is to get started right away to maximise my “time in the market”.
The post £3 a day vs £30 a day passive income plan appeared first on The Motley Fool UK.
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John Fieldsend has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
