Here’s how investing £3.50 a day could turn into a £5,844 annual passive income

At today’s prices, it can be hard to get a coffee for £3.50. But putting that amount aside each day could be a first step to generating some serious passive income.

Investing £106 a month (the equivalent of £3.50 a day) at a 6% annual return results in a portfolio worth £103,936 after 30 years. And that could create £5,844 a year.

Compound interest

When it comes to building a passive income portfolio, having a long-term approach is a huge advantage. Results take time, but they can be spectacular for patient investors.

After 20 years, a £106 monthly investment that achieves an average annual return of 6% could generate £2,701 a year. But with just 10 more years, the potential return more than doubles.

Source: The Calculator Site

That’s why having more time is such an advantage. Delaying for a year or two means missing out on the returns from years 29 and 30, which is where the real rewards come in.

Other things being equal, it’s better to be earlier than later when it comes to starting investing. But it’s also important to find something that can offer a good return for a long time.

Regular investing

Investors looking for passive income have a number of options to choose from, including stocks, bonds, and real estate. But a 30-year UK government bond currently comes with a 5.27% yield.

Over the last 20 years, the average return from the FTSE 100 has been 6.89%. That guarantees nothing about future returns, but I think it makes it reasonable to hope for at least 6% a year.

The best time to buy shares is when prices are low. And one advantage of regular investing is that maximises the chance of having cash available when opportunities present themselves.

It means investors need to think carefully about which companies are going to be able to keep performing well decades into the future. But I think there are a few names that stand out.

A stock to consider buying

I stock I think’s worth considering is drinks major Diageo (LSE:DGE). It has a 4.5% dividend yield, but investors also got an extra 1.5% return from share buybacks last year.

Given this, the company only needs to keep doing what it’s doing to reach the 6% target over the long term. And anything beyond this is a potential bonus for shareholders.

That’s not to say this will be straightforward. The rise of GLP-1 drugs might well dampen demand for the company’s alcoholic products, at least among certain demographics and consumers.

Nonetheless, CEO Debra Crew has identified some important growth avenues for the firm. I think these look promising, which is why it’s a stock I’ve been buying over the last few months.

Diversification

Diageo shares are unusually cheap at the moment and I think this is an opportunity worth considering. But I’m not expecting this to be the case indefinitely.

Regular investing offers the chance to build a diversified portfolio over time. If the market turns pessimistic about something else in the future, investors shift their focus to take advantage.

Returns are never guaranteed, but there’s a lot to be said for investing regularly in the stock market. With time and patience, it can be a great way of earning significant passive income.

The post Here’s how investing £3.50 a day could turn into a £5,844 annual passive income appeared first on The Motley Fool UK.

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Stephen Wright has positions in Diageo Plc. The Motley Fool UK has recommended Diageo Plc. 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.