Story by Cliff D’Arcy

One of my heroes is Warren Buffett, often considered the world’s greatest investor. His wisdom has guided me for decades, but had I listened earlier, I’d be worth millions more. The Oracle of Omaha warns about passive income: “If you don’t find a way to make money while you sleep, you will work until you die.”

Unearned income

Passive income is earnings from outside of paid work. Alas, there’s no such thing as a free lunch and everything worthwhile takes effort. I’ve built passive income over decades, but what are the snags? Here’s ChatGPT’s reply:

The main problems with passive income are that it often requires significant upfront effort or capital, comes with inherent risks and no guarantees, and still demands some level of ongoing maintenance to be successful. The idea of truly effortless passive income is largely a myth.

I agree with this chatbot’s summary. Today, my family’s passive income can exceed £10,000 a month from various sources, including these four income streams:

* Savings interest (from cash deposits)

* Interest from government and corporate bonds (mostly safe, but not 100% guaranteed)

* Occupational pensions (from companies my wife and I previously worked for)

* Dividends from company shares (a risky, but mainstream, investment).

I’ve listed our four income streams from smallest to largest. Largest is our dividends from owning stakes in American, British, and global businesses. While we sleep, hundreds of millions of workers work for us — exactly as Buffett suggests.

Today, our passive income is a river, but it began as a trickle. Indeed, I started investing in the 1980s with only a few pounds. Back then, £20 a week was too much for me, but it’s what some investors might start out with today.

Here’s the maths: £20 a week is roughly £1,000 a year, so let’s say someone invests £1k each year into shares. Growing at, say, 8% a year, this produces a pot worth £125,020 after 30 years. That’s the initial £25k and £100,020 of gains, showing the power of compound interest.

But here’s the trick: as our incomes and capital increased, my wife and I kept ratcheting up our investment levels. Today, we invest thousands of pounds a week into owning more shares. For us, this has been one path to lasting wealth.