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How I’d invest £11.25 a week for a passive income

Close-up of British bank notes

One of the easiest ways to save money is to reduce spending. And one of the easiest ways to reduce spending is to reduce purchases of goods and services I can create for a lower cost at home.

Coffee is the perfect example. By having coffee at home rather than in a coffee shop, I estimate that I can save as much as £11.25 a week. Ultimately, I could use this money to create a passive income from a portfolio of stocks and shares.

Passive income from coffee spending

Coffee at my local shop costs around £2.50 a pop. I calculate I can replicate the same product at home for around 25p. That is a saving of £2.25 a day, or just under £11.25 a week, £48.75 a month, or £585 a year. 

A figure of £585 is not enough to generate a passive income straight away. However, over the space of a couple of years, it could help me build a diverse portfolio of equities, which have the potential to generate a regular income. 

There are plenty of companies on the market with tremendous potential as income investments. Homebuilder Persimmon currently offers a dividend yield of around 8%, and the mining giant Rio Tinto yields approximately 10% (an average for the next two years, based on current forecasts). 

A sum of £585 invested across these two companies would potentially generate an annual income of just under £53 per annum. After two years of saving, and assuming I reinvest all of my income from the portfolio, I would have a portfolio worth £1,276.69, generating £54.80 per annum in dividends. 

Future growth 

When I have put the foundations of my passive income strategy in place using the above approach, I can start focusing on growing my balance. There are a couple of techniques I can use to meet this aim. 

Of course, I can save more. This is the easiest way to increase my savings and investment pot. If I can put away an extra £10 a week, or £520 a year, my savings pot would be worth £2,313.66 after two years. That would give me the potential to earn £103 a year in passive income, assuming I continue to invest in the corporations outlined above. 

The other strategy is to invest more in growth stocks rather than income plays. Using this approach, I might be able to earn a higher return on my money above 9%, although it is far from guaranteed. There is even a chance I could end up losing money, which is not something I really want to do. 

On the topic of risks, when investing in dividend stocks, there will always be a risk the companies may cut their distributions to investors. In this scenario, I may have to re-evaluate my investment strategy. 

Still, I believe the passive income strategies outlined above can help me generate a recurring income stream with stocks and shares even when taking this challenge into account. 

The post How I’d invest £11.25 a week for a passive income appeared first on The Motley Fool UK.

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Rupert Hargreaves 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.