When it comes to income shares, it’s hard to look past the FTSE 100. The huge Footsie firms offer me impressive payments if I invest in them. This passive income could then help me build wealth.
Let’s say I wanted to target a £1m net worth with income shares. If I was starting from scratch, I think I could hit that figure by investing £327 a month. Here’s how.
Two factors
With some basic maths, I can show how £327 monthly potentially turns into £1m. The calculation is simple, but it relies on two important factors.
First, how long would I be investing? I’m around 30 years from retirement age, so that figure seems as good as any. I’d be pretty happy to hit a million by then. If I wanted to hit that target in fewer years, I’d need to invest a higher amount.
Second, I need to estimate a rate of return from my income shares. Historically, the average return of the huge FTSE 100 companies is around 8%. The return of smaller, more UK-focused firms on the FTSE 250 is around 10%. So those give me a decent starting point.
Of course, I subscribe to the Foolish approach where sensible, well-researched investments can lead to higher-than-average returns over the long run.
By doing this, I could aim for a higher average return of 12% from my income shares. That small increase makes a big difference over time.
There’s some risk to this approach, and no investment is ever guaranteed a return. I have to accept that my investments might under-perform or even fail. I’ll aim to balance this risk by diversifying. I won’t buy shares in just one company, but 10, 20 or perhaps more. This gives me a buffer in case of a bad pick or two.
How to get to a million
Here’s what I get by plugging the numbers into an online investment calculator. I’ve included 15, 20 and 25-year periods for comparison.
Investment amount to reach £1m net worth
| 15 year | 20 years | 25 years | 30 years | |
| 6% | £3,485 p/m | £2,205 p/m | £1,478 p/m | £1,026 p/m |
| 9% | £2,727 p/m | £1,565 p/m | £945 p/m | £587 p/m |
| 12% | £2,121 p/m | £1,097 p/m | £593 p/m | £327 p/m |
It seems unbelievable that a few hundred pounds a month can get to a million like that. But that’s just the compound interest doing its stuff. And this isn’t pie-in-the-sky theory either, thousands have already made it to a million in Stocks and Shares ISA accounts.
In reality, I don’t expect I’ll save and invest the same amount every month for three whole decades. Likewise, £1m might not be a target I ever reach.
Instead, I look at this as inspiration. If I keep in mind how powerful investing in income shares is? I’ll be more motivated to continue to drip-feed savings into them.
And even if I got to something like £250,000, that might seem small in comparison. But it’s still £10,000 a year at a 4% withdrawal rate. And with a bit of luck, I’d still have the full amount for a rainy day, or simply for something to leave behind for loved ones.
