Recently, I was talking to a friend about how much money he’d need in the bank to walk away from his job. When we thought it through, the answer was a lot. The better option would be to be able to make enough money from the stock market to provide an income instead. But how much would I need to invest to make it a reality?
Key factors involved
A big factor to get nailed down to begin with is how much I’d want to make. I’m not going to be outlandish and aim for £100k a year (even though this would be nice). Instead, I’m going to set the figure at £50k.
I think it’s true to say many would be happy to accept a slightly lower income if it came from the stock market. Given that it doesn’t demand me to be on my computer all day every day, the flexibility is a huge bonus versus other ways to make ends meet.
The second key factor is how I want to take the income. Do I need to bank money every month? Or can I be more flexible and take a chunk every six months or so? This will impact what type of stocks I decide to invest in.
The type of stocks
For a more regular income stream, I’ll benefit most from dividend stocks. If I can grow a portfolio to include a dozen or more companies, there’s a good chance I’ll get paid a dividend each month.
If I can be more selective, I can choose some more growth stocks. These could offer me strong capital gains, but I might need to wait six or 12 months before I’m able to trim some profits and use this to live off.
Risks to be aware of
As with anything, putting my eggs (earning hopes) in one basket (the market) is risky. There’s a chance I won’t earn anything from the market. This could happen if growth stocks underperform and if the income stocks halt dividends.
I need to be conscious that this isn’t like a regular job where my hard work is correlated to how much I get paid. If I don’t have much money to invest to begin with, I’m limited to the amount I can earn, irrespective of how much effort I put in.
Talking about the numbers
If I’m fortunate to have a large amount ready to invest, I could be ready to go straight away. If I assume an overall return of 7% a year from a mix of dividends and capital growth, that would be the amount to live off.
On that basis, if I invested £714,285 today, I’d hope to make the £50k each year.
That’s a lot of money to put to work right now. An alternative way would be to build up over time. If I invested £1,000 a month and reinvested the profits, I could reach my goal after 24 years.
I’m not claiming either option is completely viable for me at the moment. But it does serve as a barometer for knowing the rough figures.
The post How much do I need to invest to make a living from the stock market? appeared first on The Motley Fool UK.
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Jon Smith 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.
