Early in a year, many people make resolutions. A common one is to start earning passive income. But for a lot of people, such income remains a dream rather than a reality by the time December comes around again.
I think an easy answer to that for me could lie in another common resolution — to cut down on drinking alcohol.
The cost of drinking
Dry January is a time when many people try to stop or reduce their alcohol intake. That can be good for their health. But it can also bring some financial benefits.
The Office for National Statistics estimates that last year, the average household spend on alcohol was £9.30 per week. That equates to about £3.88 per person. In reality, many people don’t drink. So people who do normally spend on alcohol will be paying out more than £3.88 per week on average. For simplicity, let’s say it’s around £5. Over the course of a year, not spending £5 a week on alcohol could cut out about £260 of expenditure for a drinker. In January alone, it could save over £20.
Using the savings to start a different habit
Saving money can be a good thing. But what if instead of simply frittering those savings away on other indulgences, I used them to start earning passive income?
I think that is possible by investing in UK dividend shares. Such shares would typically pay me a dividend each year for holding them. So, if I invested £260 in shares this year and held them for the long term, I would hope to get passive income from them for years to come. But dividends are never guaranteed and the fortunes of companies can change. So I would seek to reduce my risk by diversifying across different shares. With limited capital that can be harder, but still possible. I reckon £260 would be sufficient for me to diversify across a couple of different shares by the end of 2022, for example.
Choosing the shares
I’d probably set up a regular payment so the money I saved on drinking went into a Stocks and Shares ISA. I would save the money regularly until I had enough to start investing.
Meanwhile, I would do some research into what sort of UK dividend shares might suit my individual investing style and risk tolerance. I’d probably begin by investing in blue-chip companies with strong free cash flows and decent yields. For example, energy distributor National Grid has a dividend yield of 4.6% and Tesco yields 3.1%. Both come with risks though. Changing patterns of electricity use and shopping could hurt revenues and profits at the two companies, for example. But if I diversify across different stocks, I ought to be able to reduce my risk and still build long-term passive income streams.
I could make a start right now, in January. But one month alone wouldn’t make much difference to my long-term financial health. Instead, I would seek to use it as a starting point. Then I could continue with the new habit every month after that.
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Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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.