How to earn a passive income with only £5 a day

For sure, is possible to earn a passive income with an investment of just £5 a day. This is about as much as many people might spend on lunch when working in the office, or or on a couple of coffees with friends.

An investment of £5 a day works out as £35 a week, or just over £151 a month. For the year you would save around £1,800.

You could generate a passive income from this lump sum almost immediately, with a couple of stocks that support dividends yields of 8%-10%. As such, if I were to invest all of this money in a stock yielding 10%, you could earn a passive income of £182 a year.

However I would invest in growth stocks for at least the first 10 years of saving. I think this will help expand the size of your portfolio and could enable you to generate a higher return when you switch from growth to income. To do this, invest in a tracker fund - I believe I can achieve an annual return of around 9% using this approach. At this rate of return, I calculate I will be able to build a nest egg worth £30k after a decade.

If I switch from growth to income investing at this point, assuming I can find stocks yielding 8%, I may be able to receive a passive income of £2.4k a month.

If I keep saving, I can boost my nest egg even more. After 20 years of saving £151 a month, assuming an annual rate of return of 9%, my figures suggest I would have a portfolio worth £100,000. By switching from growth to income when I hit this level, I estimate I could achieve an annual passive income of around £8,000.

Of course, there are a lot of assumptions in this calculation. There is no guarantee I will achieve an annualised return of 9% on my money. Nor is there any guarantee I will be able to find income stocks offering a yield of 8%, or more.

Still, I think these numbers clearly illustrate how my strategy can achieve results over the next couple of decades.

Some of the companies I would be happy to buy for my portfolio as income investments include British American Tobacco and Phoenix Group. Shares in these corporations currently offer and 7%. As passive income investments, I believe they provide the perfect mix of income and the potential for modest capital growth as they grow and develop over the next few decades.