When I think about passive income, it’s the word ‘passive’ that stands out to me. That is, making money without doing any work.
Stocks are the perfect example of this. When I buy a stock, I click a few buttons on a website and that’s it. I don’t need to do anything else to get dividend payments or see my stocks rise in value. That sounds truly passive to me.
If I had an empty ISA, I think I could use stocks to work towards a £3,057 income each month. In this article, I’ll explain exactly how I’d hope to get there even with just a £99 a month saving.
Let’s start with the ISA. After all, if my account reads £0, I’m not thinking about a massive passive income one day in the future. I need to take a few baby steps first.
I’d aim to add £99 a month to the ISA. That would be a good starting point. It doesn’t sound like that much, only two digits. But these days, it’s the cost of a night out or a trip to a concert. And even at that amount, it could lead to big payments later on, as I’ll get to in a second.
So how is this going to work? Well, I’ll look to grow my savings by investing in a Stocks and Shares ISA. While this is not a sure thing, stocks in this country have a long history of excellent returns. The FTSE 250 index, for example, has an average return of over 10%.
And of course, I get this income passively, with no extra work once I’ve bought the stock.
Not for long
If I wanted to invest in UK shares, now would be a great time to start. The stock market in this country is at a low ebb and equities look cheap on many metrics. I still can’t believe the FTSE 100 forward price-to-earnings ratio has dropped to around 10. It might not stay that low for long.
As bullish as I am here, I will point out that this isn’t risk-free. Stocks can be volatile and there is also no guarantee that future returns from stocks will be similar to past returns.
There are ways to lessen the risk. I could diversify across different companies and sectors to balance out the ups and downs. I could even invest in an index fund to give me the safety of investing in an entire market.
Doing this, I would hope to see my ISA grow as companies earn profits. The stocks might pay me dividends, or I could see my stake rise in value as it grows. That will give me a passive income.
Big passive income
How much can I get? Well, I said I’d aim for an income with £99 a month, so let’s see how that does with different rates of return. The following table shows a few examples.
Looking at the highest value, a £36,678 yearly income would lead to a £3,057 monthly income. Not too bad from £99 a month. Although I will say that is at the high end if I want to keep my income long into the future.
| Yearly passive income | |||
| 6% | 9% | 12% | |
| 1 year | £112 | £169 | £228 |
| 5 years | £453 | £728 | £1,039 |
| 10 years | £1,008 | £1,758 | £2,737 |
| 20 years | £2,745 | £5,790 | £9,698 |
| 30 years | £5,855 | £15,332 | £36,678 |
