Having a passive income, and being able to earn money while you sleep can revolutionise your finances! You wont have to worry about work, and you can put your cash flow on autopilot. One of the best ways to generate a passive income is to invest your money and I think you can build a passive income-generating portfolio with an investment of just 50 a week.
The benefits of compounding
If you want to start generating a passive income straight away, you need to start saving as much money as possible.The good news is, you dont need to earn thousands of pounds a month to be able to build an investment portfolio thats big enoughto give you a passive income.
One of the most attractive things about investing is the benefit of compound interest, essentially the process of your money making money. So, the more you save, the more you will earn. As well as earning more money, when you start generating a passive income, youll have more time to spend on other projects that will help you achieve the same aim.
Building a pot
How much you need to save depends on what level of income you want to achieve. For this example, Im going to target an annual income of around 5,000. This isnt a tremendous amount (compared to the UKs average annual salary of 29,000 per annum), but it will provide you with a level of basic income to help you start your passive income journey.
Im also going to be using income funds in my example. These give investors diversified exposure to income stocks, which I think is a better option if youre looking to generate a passive income. With single stocks, if just one of the companies youve chosen decides to cut its payout, your income could take a sudden hit. The best way to avoid this is with diversification, but building a portfolio of say 50 stocks to improve diversification can be quite expensive.
Finding an income fund
I think one of the best income funds around is the iShares UK Dividend UCITS ETF. The fund tracks the FTSE UK Dividend Plus index, which includes the 50 highest-yielding companies in the FTSE 350 Index and costs just 0.4% per annum. At present, the ETF supports a yield of 6.9%.
At this rate of return, I calculate a saver would need to put away 50 a week, or an average of 217 a month, for 17 years to build a savings pot worth 83k, throwing off around 5.2k a year in passive income. In this example, Im assuming there are no withdrawals during the first 17 years to allow the power of compounding to really work its magic.
On contributions of 500 a month, I calculate its possible to hit my passive income target within 10 years (once again assuming no withdrawals until this point). With a deposit of 650 a month, or 150 a week, it would get you there in eight years, according to my figures.
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