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Passive Income – how to start with just £100

11–14 minutes to read

Passive income is the holy grail of Financial Independence. The dream of making money by doing absolutely nothing. Done correctly, passive income can be used to replace your 9 to 5.

However, is it actually a thing? Is it passive income without trading time for money actually achievable? With passive investing, possibly so. And in that case, you can even start with a very small amount of money. This article is going to help you get started on your passive income journey through investing, starting with just £100.

What is Passive Income?

Passive income is money that you earn with little or no work. That is to say, when you are not trading time for money. By contrast, most people only earn active income.

Active income is what you work your day job for. Or, if you are self-employed and still operational.  Active income is about you giving up your time for money. This is usually an hourly rate or an annual salary.

Passive income, technically, can be made without trading your time for money. Theoretically, it can be made while you’re working your 9 to 5 or even while you sleep!

Therefore, the idea of passive income is very appealing to pretty much everyone. Who doesn’t want to earn money when they sleep, right?

Heads up – we always aim to produce honest and accurate content. However, we are not financial advisors. If you need financial advice, Unbiased can connect you with a suitable professional for free. Some of our links may earn us a small commission to help us run the site.

Is passive income a side hustle?

No. Passive income is often associated with side hustles or rental property. However, each of those requires effort or work and often more than your main income. Passive income allows you to walk away from what you have done and watch that decision later generate you money.

Of course, you can make passive income by investing your time and this may yield a quicker result. However, it also often requires a far greater investment of time before it starts generating you an income.

Examples of this include starting a business where you slowly extract yourself from the day to day running. However, this could take years and will it ever be truly passive?

I’ve started my own businesses as side hustles and believe me, any income they generate definitely doesn’t feel anywhere near passive. They have required me to work extra long hours and sacrifice time in other aspects of my life. I do them because I enjoy them and in many years to come, they should continue to provide me with an income.

However, this significant trade of time for possible money in the future is not for everyone. In fact, it’s not for most people.

So, for this article, we are going to focus on how you can start making passive income without sacrificing your time, through passive investing.

Creating passive income through investing

Through the power of compounding, investing even as little as £100 can start creating a snowball effect. The earnings your initial investment makes can be combined and reinvested, thus making even more subsequent earnings. Thus the cycle continues.

Your financial snowball grows larger, collecting more and more money over time.

Starting with £100

All sounds good in principle. But let’s take a reality check. Starting with even £100 is great and everyone needs to (should) start somewhere. However, a £100 investment is never going to create ‘Lambo’ money! If you have seen Instagram influencers promising unrealistic returns by following their programme, then this is usually a scam. These schemes do actually create a passive income, just not for you! It’s for the ‘influencer’.

At Eat Sleep Money we don’t promise ‘Get Rich Quick’ schemes or sell sketchy investment schemes. Our aim is to help you build a solid financial platform to grow your future wealth from. To inspire you to take action. Knowledge when applied is actions. And action is power. Getting financially educated and taking action is priceless.

So, be realistic with your expectations but do absolutely take action. Most importantly, take action today. The power of compounding grows stronger over time. The earlier you can start, the greater your long term rewards and the more your investments weather the inevitable storm.

Today it may be £100. In a year’s time, it could be £250. In ten year’s time, it could be £5,000. All without lifting a finger.

What’s important is that you start. And you start now, with whatever you have.

Robert Kiyosaki, in his book ‘Rich Dad, Poor Dad‘, describes each dollar (ie, pound) as an employee. By investing each employee, you put them to work and eventually those workers will bring back more workers. Those new workers and your existing workers will combine and continue to find more workers. Eventually, you’ll have an army of workers all building you a better financial future. As they say ‘money makes money’.

What is passive investing?

There are two main methods of investing:

1.Active investing – also known as ‘stock ‘picking. This is where the investor manually selects his or her investments. Deciding which stocks to buy to takes time to research and analyse. You can either pay a fund manager to do this and actively manage your investments. The downside is that it costs money which erodes your returns (and has no guarantee of greater success). Or, you can spend the time researching yourself and become an ‘expert’, which kinda defeats the point of ‘passive income’.

2.Passive investing – where the investor invests in an index, or tracker fund. They’re also referred to as mutual or exchange-traded funds (ETFs). Rather than invest in a single company or stock, they aim to track the performance of an entire financial market. Therefore, the fund portfolio has been created for you. Crucially, they are designed to match the market, not exceed it. So this strategy is unlikely to yield greater than average returns. But, they do all the hard work for, leaving you with more time.

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How to make passive income by investing

Regardless of whether you are pursuing an active or passive investing strategy, investors typically make money in two different ways:

  • Dividends – when you invest in a company, you own a small piece of it. As a reward, many (though not call) companies will pay out dividends. In the UK, dividends are usually paid every six months. In the US, it’s every three months. The amount you can make from dividends will vary between companies. Remember to check though, as not all companies pay dividends.
  • Share price growth – you can also make money (at least on paper) if the share price of the company you invest in increases in value. However, in the same vein, you can also lose money this way. Remember, investing carries more risk than sticking your cash in a savings account.

There are three different categories of investments that passive investors usually consider. These are dividend stocks, income funds and REITs. To keep things simple, we’ve used broad terms to describe these categories.

1. Investing in dividend stocks

Dividend stocks are popular. Indeed, they used to be my favourite type of investing. Dividend stocks give investors a periodic payout or ‘dividend’. The dividend is a share of the company’s profits.

This money is paid into your investing account and can then either be withdrawn or re-invested. Some people choose to withdraw the cash to create an immediate income. Other keep the dividends reinvested, propelling the snowball to grow bigger more quickly so that they can then draw down more money in the future.

Typically, dividends are between 1 and 5%. Dividend investors will usually look for companies that have consistently paid dividends over the years and have remained profitable.

In the US there is a list call the S&P 500 Dividend Aristocrats. This list features companies that have not only paid dividends but also increased them for 25 consecutive years or more.

The challenge with dividend stocks is that dividends can be cut or even stopped. Share prices can also go down. A great example of this is Tesco, which back in 2014 used to pay around 15p per share per year. In the same year though, an accounting scandal was uncovered. This decimated the share price by around 50% and cut all dividend payments for three years. Ouch! While dividends have now resumed, the share price is still yet to recover.

Need some help deciding what stocks? Check out our Hargreaves Lansdown article on picking dividend stocks.

2. Investing in income funds

If you’re not confident in choosing an individual dividend-paying company (which is totally OK), then why not let someone do it for you? Income fund managers select a basket of dividend-paying stocks and wrap them up into one ‘fund’ for you to buy.

Most income funds will have ‘income’ in the fund name. If you prefer growth over income or you don’t need the income soon, then you may want to consider an ‘accumulation’ fund.

Accumulation funds reinvest the income or dividends into more stocks and as such aim to drive the value of the fund and your share of it higher. Your investing snowball should also gather size more quickly. So this strategy may suit investors with a long time horizon.

There are many different flavours of funds depending on your requirements. Interestingly, low-cost index funds have typically outperformed most actively managed funds over long periods of time.

My own portfolio includes Vanguard”s Lifestrategy 100 Accumulation fund for the reasons mentioned above and it suites my long term strategy.

3. Investing in Real Estate Investment Trusts (REITs)

If you want to invest in property but don’t have the cash or knowledge to buy your own place, then a REIT could be what you’re looking for.

REITs typically buy and rent out commercial property. They put tenants on long leases which can help to forecast future earnings. In addition, REITs have to pay out at least 90% of their income to shareholders in the form of dividends.

Unlike individuals who will typically have a few properties all in the same area, REITs invest across multiple properties and locations to help mitigate risk.

The difference is that you can’t use leverage. When you buy a property yourself you only need the deposit. For buy-to-lets, this is typically around 25%. If you had £25,000, you could buy a property for £100,000. Then, if the property increased by 10%, you would have made a £10,000 profit (excluding costs). Not a bad return on £25,000!

In contrast, with a REIT, your £25,000investment buys you £25,000 of property. An increase of 10% only bags you £2,500. On the flip side, the advantage is you don’t have the fees or the costs or the hassle of managing tenants.

Click here for more information on how to start investing in Property Funds..

Passive investing for passive income - what we like

  • Low effort – investing can be done from the comfort of your sofa. It doesn’t require a great deal of experience or knowledge to get started and it can build a solid income stream for later in life.
  • Grow your net worth – investing has generally outperformed savings accounts over long time periods.
  • Diversification – creating an additionalal income stream from your 9 to 5 can help increase your overall income and protect yourself from risk.

Passive investing for passive income - what we don't like

  • Risk – investments can go up or down. There are no guarantees.
  • Timeframe – general guidance is that investing should for a minimum of 5 years plus. If you may need your money sooner,  then investing might not be the right location for your cash.
  • Costs – some Income funds and REITs carry larger costs than a passive index fund. Not all funds or REITs outperform passive index funds, so do your research.
  • Complexity – choosing individual dividend stocks takes time and effort. Investors typically review these decisions periodically which requires more time and effort and therefore may not be strictly considered as passive.

Passive income - getting started

To get started you are going to need an investment account. We’ve reviewed a few of the larger UK platforms below.

  • Hargreaves Lansdown – award-winning investment platform with an easy-to-use interface and app.
  • Fidelity – slightly cheaper than Hargreaves Lansdown but less intuitive app and website.
  • Interactive Investor – typically cheaper for investors with over £50,000.
  • Vanguard Investor – renowned for low costs, however limited choice and no app. Minimum £100 per month.
  • Freetrade – great for starting with a small amount. Plus, get a free share when you use our link and deposit £1 – Freetrade Free Share.
  • Trading 212 – like Freetrade but more complex for beginners. You can also get a free share when you use our link and deposit £1 – Trading 212 Free Share.

When you open an account, you need to decide if you want to wrap your investments in a Stocks and Shares ISA (tax-free but limited to £20,000 annual investment) or a General Investment Account (earnings are taxed, but no Iimit). Due to the high cap, most investors will use a Stocks and Shares ISA. Our guide walks you through the basics.

Remember, for most people, starting small is a great way to learn about investing. Check out our Beginners Guide to Investing to learn more about getting started.

How to free up more cash for investing

If you’re keen to get your investing journey started then you are going to need to free up some spare cash. Our Financial Fitness Programme can help you:

  • Automate your finances.
  • Prepare for unexpected financial events.
  • Reduce your monthly expenses.
  • Increase your monthly savings.
  • Increase your net worth.

You can get Phase One for free by becoming a subscriber.

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Passive income through passive investing - conclusion

Creating passive income through passive investing can help increase your financial security, reduce risk and give you back more time. 

Over time, your passive investments mean you no longer trade time for rmoney, so you can do more of what you love.

Crucially, the sooner you start and with whatever amount, the more time is on your side.

Investing isn’t for everyone though and it does carry risk. Investors typically consider their money locked away for a minimum of five years, so make sure you don’t need this money anytime soon.

I’ve been building my own financial snowball for around 10 years. While it started small it’s now picking up speed and growing faster than I can add cash to it. I’ve seen ups and downs but over the long run, it’s worked well for me. It’s not a get rich quick programme but it could help to build a solid financial future. I look forward to a future where I can extract the fruits of my labour.

Here’s to Financial Fitness.

EatSleepMoney.co.uk does not offer financial advice and is intended for reference/information only. Remember, you should always carry out your own research and/or take specific professional advice before choosing any financial products or services or undertaking any business or financial venture. If you need financial advice Unbiased can connect you with a suitable professional for free. Investments may go up as well as down and you may get back less than you put in.