How much passive income could saving £3 a day get you? Not much, it would appear. The last few years of painfully high inflation have massively reduced the buying power of £3. It’s not enough money to buy a meal deal anymore. And I’d be gobsmacked too if I walked into a place where I could get a cup of coffee for that price.
Nevertheless, with the right investing strategy – one that focuses on using the stock market as a kind of ‘force multiplier’ – even a few quid a day could turn into something meaningful. By my calculation, a £3-a-day savings rate could lead to a yearly passive income of as much as £11,925 one day. Let me explain how.
End results
What does £3 a day give us then? Per year, that’s £1,095. And if we assume an investor starts their investing journey at 25 and ends it at 60 to give 35 years of saving, investing and compounding, we’re looking at a total of £38,325. In other words, nothing to write home about.
The idea is that our investments are going to grow the wealth more than that, and the trick is that compound interest will do a lot of the heavy lifting. Most people understand the basics of compound interest, but even long-time investors can be surprised by the end result.
If we apply an average 10% return over the years (broadly in line with historical averages) then the sum total will be £298,127. The nest egg is around eight times bigger because of the investments made over time.
Someone withdrawing at a 4% drawdown from that sum would receive passive income of £11,925 a year.
There’s a problem here though. That 10% isn’t guaranteed and many people will gain less than that. Even with the 10%, most don’t have the foresight to start investing at 25 (I certainly didn’t). So how can we apply the same process to a shorter timeframe than 35 years?
Stock to buy?
One of the ways to get an edge over the average return is to invest in better-than-average companies. One firm that fits the bill for me is US tech titan Apple (NASDAQ: AAPL), which I believe is a step ahead of any of its competitors.
The maker of the iPhone, MacBook et al is a mature company now and not likely to ’10-bag’ in double-quick time. But that doesn’t mean the rewards can’t be impressive. In the last five years, the share price is up 147% – a growth rate of over 19% a year.
Individual stocks come with their own challenges, too. The recent ‘Trump tariffs’ came out of nowhere and were a big blow for a company that outsources manufacturing to countries like China.
With a sizable £230 share price, a ‘£3 a day saver’ may need to look at fractional shares to own a smaller stake. And there’s the option of UK stocks that even new investors will know like Greggs, Tesco or Games Workshop.
Overall? Putting spare cash (of even a few quid a day) into the best companies going will always be a winning strategy. Only time will tell if Apple is one of those companies in the future, but I think it’s worth considering as part of a wider portfolio.
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John Fieldsend owns shares in Apple, Tesco and Games Workshop.
