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Earning passive income from a Stocks and Shares ISA to help enrich our retirement sounds like a good idea. But don’t we need piles of cash to even get started in the stock market?
No, we really don’t. So follow along with me as I work out what we might hope to achieve with just £10 per day.
There’s one thing we have to be honest about — it’s going to take some time. But it can be surprising how nicely compound returns can build up over the years.
I’d probably save my daily tenner and send over a month’s worth at a time to my ISA. I go for around £1,000 for each investment, to keep trading costs down. So I’d expect to buy some shares every three months or so.
What to buy?
Beginners often start with an index tracker like the iShares Core FTSE 100 UCITS ETF (LSE: ISF), which provides essential diversification. I also favour things like the City of London Investment Trust — it goes for a smaller group of stocks, and has raised its dividend for 58 years in a row.
Investments like these can keep us going nicely while we develop a strategy for individual stocks.
The FTSE 100 has produced an average annual return of 6.9% over the past 20 years. I’d expect the iShares Core FTSE 100 to come close to future FTSE 100 returns, minus its small annual management charge of less than 0.1%. So let’s say 6.8% — not a prediction, just an example to work with.
What’s it worth?
The chart above shows we have to expect volatility, especially in the short term. I wonder how many investors panicked over that July Trump tariff dip?
Look back further, and the index tracker suffered exactly like the entire market in the Covid crash of 2020 — because it effectively is almost the entire market. So while a tracker gives some safety in diversification, it’s still open to stock market risk. But the chart also shows that the longer the timescale we look at, the more we see the ups and downs even out.
I’ll assume the FTSE 100 matches its past performance, though that’s clearly not guaranteed. After 10 years we could have invested £36,500 (forgetting about leap years for simplicity). At 6.8% per year reinvested, we could see it grow into almost £51,800. And that could then generate about £3,500 per year in passive income at 6.8%.
It gets better
After another 10 years we could see our pot triple to over £150,000. And that could earn £10,300 per year. Doubling the time could treble the results.
After a third decade, our pot could soar to £340,000 — and our passive income to £23,400 per year. Isn’t it amazing the way the extra years can compound up so much?
None of this is guaranteed. And an index tracker like this could lose money in the next downturn. But the UK stock market has beaten other investments for more than a century. And numbers like these inspire me to invest as much as I can for as long as I can.
