We’d all love to have a passive income, especially if it’s tax-free and comes from an ISA. It might just be a little something to help us with bills and living expenses, or maybe we want the income to fund that annual holiday we so desperately crave.
So how can we go about turning an empty portfolio into one that generates £1,510 in weekly passive income? Let’s take a closer look.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Start right
These days it’s even easier to start investing with almost no money at all. This is partially a result of no- or low-fee investing platforms and the emergence of fractional shares.
But before I kick everything off, I’m going to want to make sure I’m clear of debt. When investing for the long run, we look to take advantage of compounding returns, and this only works if we don’t need to take money out of our investments.
Once that’s done, I can look to open an investing account. And if I’m starting with very little capital, I’ll want to choose one with low or no trading fees. There’s no point investing £50 with Hargreaves Lansdown if the platform is taking a fixed £11.95.
And finally, if I don’t have any capital to start my investing, I need to set up regular, and preferably automated savings. This is a great way to grow my portfolio while ironing out the peaks and troughs of the market.
Let it compound
Compound returns is one of the most important and effective investment strategies. It works by reinvesting our returns — or investing in companies that reinvest for us — year after year. This allows us to start earning interest on our interest as well as the original investment.
It might not sound like a winner strategy, but it really works. The growth rate is exponential because the larger it gets, the more it grows. As such, the longer I leave it, the quicker it grows.
How it could work
So let’s imagine I look to invest £200 a month. This allows me to build up my portfolio over time by taking a proportion of my income and adding it to my portfolio. Of course, I don’t need to invest that money in stocks and shares immediately, I can leave it in cash until I spot the right investment.
Next, I’m going to want to make sure I’m picking the right stocks. If I pick poorly, I could lose money, and that’s something we all want to avoid. I’m going to need to do my research to make sure the stocks I pick are right for me.
If I choose well, I could be looking at annualised returns of anything from 6% to 12%. Of course, I might lose money too. But let’s take a look at how much passive income I could generate on a weekly basis when using this compound returns strategy and a long-term outlook.
| 6% | 8% | 10% | 12% | |
| 5 years | £14 | £20 | £26 | £32 |
| 10 years | £35 | £52 | £72 | £97 |
| 20 years | £102 | £172 | £274 | £425 |
| 30 years | £223 | £437 | £822 | £1,510 |
