Make money passively? Generate cash without doing anything? Sounds like a pipe dream, doesn’t it? But that’s exactly what passive income promises.
However ‘passive’ income is sometimes misleading and sometimes just downright wrong. Is being a landlord passive? Owning an online business? These endeavours sound like a lot of work to me.
The stock market, however, hands us a true opportunity for passive income. I can build a wealth-building portfolio and receive consistent returns with minimal effort. Once it’s set up? I don’t even need to check up on it.
I could even put away £200 a month and end up with a £2,495 monthly passive income – even if I started with zero savings. Here’s how.
Chase down
My first step is to find a suitable investment. A 5% return from dividends isn’t too taxing – over 90 companies across the FTSE 350 pay more (and many pay much more). So I could instantly create a passive income stream even with the very first £200.
Okay, so I’m sitting after 12 months with an extra tenner to my name. Do I take my earnings to Gregg’s and enjoy a slap-up feast? No, I’m going to take that cash and reinvest it. A longer time horizon is the key to chasing down big money.
Each £200 won’t make much on its own, but put them all together with a regular return and let it compound for years and, well, this is how people use investing to get rich.
Before I calculate exactly how much I could earn here, I’ll mention that even passive income stocks are more than just dividends. I want to invest in high-quality businesses with growing share prices too.
Later on
How much can I expect? No one can predict the future, but the past gives us a guide. A Vanguard report found, from 1901 to 2022, stocks in the UK returned 9.18%. That’s no guarantee that will continue, but for the sake of argument let’s assume I get a round 9% a year.
So now I’m investing £200 every month, which is compounding at 9%. I’m doing everything right, but after one year, I still only have £2,400 deposits and £97 interest.
Time to give up, I suppose. Maybe the trip to Gregg’s wasn’t such a bad idea, after all. But hang on! One of the idiosyncrasies of investing is how little happens early on, and how much happens later on.
If I save the same £200 a month over 35 years, then I have £84,000 in deposits and £491,955 in interest. The amount I’m investing is close to the average UK citizen’s savings rate, and yet I finish with a total of £538,729.
Nest egg
When I’m ready to withdraw, I could collect my 5% dividends for a yearly income of £26,936. That’s £2,495 a month and best of all, it’s real passive income. I’m not working my fingers to the bone to get it.
Because this income really is passive, I could use it to retire. Income from stocks is the basis of the popular ‘FIRE’ movement – become ‘financially independent and retire early’.
And throughout it all, I’m building up a large amount of capital. A chunky nest egg could be a lifesaver in financial emergencies or something nice to leave behind for loved ones.
The post How I’d invest £200 a month in shares to target a £2,495 monthly passive income appeared first on The Motley Fool UK.
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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.
