My earliest attempt at building a passive income was a complete failure. I naively and optimistically put a few thousand pounds into a savings account with the hopes I’d get a decent chunk of cash back. My first month’s interest was about 40p. Safe to say, I wasn’t impressed.
Throwing my life savings into a 0.5% interest account wasn’t my only mistake, but I’ve had a lot of success too. I’ve since watched the cash I invest multiply far more than I could get through cash savings or even property. I’m now on course to withdraw a sizable passive income one day that would never have been possible with other investments.
Let’s say I was starting today with £100 and I wanted to build a passive income without wasting years spinning wheels and getting subpar returns. So here’s what I’d do to target a £11,687 yearly passive income.
What to do
My first step would be to open a Stocks and Shares ISA so I can invest in the stock market. This would have sounded crazy to my younger self. After all, I’d only ever seen the stock market on television or in documentaries, usually where smooth-talking Americans lose millions of dollars. It seemed risky and not something I wanted a part of.
What changed my mind was seeing how much money could be made with stocks. The MCSI World Index – like a tracker for the major stock markets of the globe – has grown at 10.6% on average in recent decades.
Other investments struggle to match that return, and aiming for 10% or more is the cornerstone of many passive income strategies.
An eye on an income
And while 10% a year sounds like a decent chunk of change, it’s hard to overstate how rapidly the cash grows over long periods. To take an example, if I save £100 each month for 30 years, I end up with £36,000. Not too bad. But it won’t provide much in the way of a passive income.
Saving
1 year
£1,200
5 years
£6,000
10 years
£12,000
20 years
£24,000
30 years
£36,000
But if I save that exact same amount and add 10.6% each year in the form of interest, I end up with £233,743. My investments reach as high as they do – over six times the amount I put in – through the compounding effect as I get ‘interest on the interest’.
Saving
Investing
1 year
£1,200
£1,268
5 years
£6,000
£7,833
10 years
£12,000
£20,797
20 years
£24,000
£77,753
30 years
£36,000
£233,743
When it’s time to enjoy my passive income, I’d withdraw a smaller amount. Something like 5% can be achieved through dividends – many FTSE 100 stocks offer a higher return – which could bring me a passive income of £11,687 each year.
As nice as working towards a passive income sounds, there are no guarantees here. Past performance is not guaranteed to continue, and I can lose money investing this way. On balance though, I feel there is no better place for my money.
Passive income it is, then!
The post How I’d invest my first £100 today to target an £11,687 passive income appeared first on The Motley Fool UK.
However, don’t buy any shares just yet
Because my colleague Mark Rogers – The Motley Fool UK’s Director of Investing – has released this special report.
It’s called ‘5 Stocks for Trying to Build Wealth After 50’.
And it’s yours, free.
Of course, the decade ahead looks hazardous. What with inflation recently hitting 40-year highs, a ‘cost of living crisis’ and threat of a new Cold War, knowing where to invest has never been trickier.
And yet, despite the UK stock market recently hitting a new all-time high, Mark and his team think many shares still trade at a substantial discount, offering savvy investors plenty of potential opportunities to strike.
That’s why now could be an ideal time to secure this valuable investment research.
Mark’s ‘Foolish’ analysts have scoured the markets low and high.
This special report reveals 5 of his favourite long-term ‘Buys’.
Please, don’t make any big decisions before seeing them.
Secure your FREE copy
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#ffffff”, ‘color’, ‘#FFFFFF’);
})()
More reading
£50k in savings? Here’s what I could earn from a Cash ISA and a Stocks and Shares ISA
I’m not waiting for a stock market crash! Here are 2 stocks I’d snap up NOW!
£0 in savings? Here are 3 simple steps to start earning passive income!
Here’s my 10-year plan to reach an annual £27,347 passive second income
Down 27%, the BT share price looks a bargain to me
John Fieldsend has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
