£5 a day invested in cheap shares could create a passive income worth £20,000

Setting aside just £5 a day — the equivalent of a cup of coffee in some parts of the country — and investing it consistently in cheap shares can, over time, grow into a portfolio worth more than £400,000. In fact, this is achievable in 32 years, assuming an annual return of 10%.

OK, that’s not guaranteed. But here’s how it might be done.

Compounding to glory

This incredible growth is driven by the power of compounding. It’s often regarded as one of the most powerful forces in investing. Compounding generates returns not only on the initial investment but also on the accumulated earnings.

In the early years, growth appears modest. For example, after the first year, interest earned might be around £85. However, as time progresses, the effect becomes exponential. By the 10th year, the interest earned annually surpasses the total yearly deposits.

By year 32, the interest alone approaches £40,000 annually, far exceeding the total contributions made. This shows us how the majority of the final balance is derived from the returns on investment rather than the deposits themselves.

Consistency is key

Consistency in contributions is key. This consistency allows us to harness the full benefits of compounding. Regular investments of £150 per month provide the necessary momentum for growth.

On the other hand, interruptions or missed contributions can significantly diminish the final outcome. Automating the contributions can help maintain discipline and reduce the temptation to time the market.

An investor may look to achieve diversification by investing in two cheap shares each other. And by cheap shares, I recognise that definitions differ. For me, it means a focus on companies that are undervalued relative to their growth potential, rather than low-priced or distressed stocks.

Finally, a portfolio valued at £400,000, generating a 5% yield, could provide an annual income of around £20,000, which can significantly enhance financial independence. The earlier the investment journey begins, the greater the advantage gained from compounding over time.

Where to invest

When getting started, an investor may wish to look at ETF (exchange traded funds) or investment trusts in order to gain diversification. These are investment vehicles that invest in a host of companies and stocks themselves.

A well known one is Scottish Mortgage Investment Trust (LSE:SMT). Scottish Mortgage has a strong long-term track record, delivering a net asset value (NAV) total return of 318.1% over the past decade, significantly outperforming the FTSE All-World benchmark’s 176.5%.

In the most recent financial year to March 2025, the trust generated an NAV return of 11.2%, again ahead of the index, with performance driven by holdings in leading technology and AI companies such as Nvidia, Tesla, and SpaceX. The portfolio’s focus on innovative global growth companies has benefitted from a booming US technology sector. This sector could continue to outperform as President Trump weakens the dollar.

Scottish Mortgage’s high-conviction approach allows significant exposure to both listed and unlisted growth businesses, particularly in technology and healthcare. However, investors should note that the trust employs gearing. This is borrowing to invest. This can amplify both gains and losses.

However, it’s a trust I like. I think it deserves consideration.

The post £5 a day invested in cheap shares could create a passive income worth £20,000 appeared first on The Motley Fool UK.

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James Fox has positions in Nvidia and Scottish Mortgage Investment Trust Plc. The Motley Fool UK has recommended Nvidia and Tesla. 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.