Anyone with £20,000 in cash savings could put it to good use to generate some monthly passive income. Some work is needed, but perhaps not much.
A Cash ISA can be great for short-term savings. The interest is guaranteed for the duration of the term too. Interest is pretty decent now, but that can only be a short-term thing.
Once Bank of England interest rates start to fall, ISA rates will have to fall too. So to aim for better income, I say we need to take a bit of risk.
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Stocks and Shares ISA
That means I’d use a Stocks and Shares ISA to try to reach my target.
There’s a couple of things a new investor really needs to understand before they start out. The first is that the stock market can be risky, especially in the short term. And ISA returns can vary wildly year to year.
The average Stocks and Shares ISA lost 13% in the 2019-20 year, for example. And in the very early days of the stock market crash that year, things looked even more painful than that.
Getting rich?
The other key thing a lot of folk get wrong is thinking they’re going to get rich quick from shares. It’s possible, but you have to be very lucky. There’s a reason that all the great investors of history achieved success by slowly building wealth over the long term.
The other thing they did was keep putting new cash in, year after year, and let the miracle of compounding do its work.
Two things
To summarise my two key points, a single year’s ISA could build up to provide £1,000 a month in passive income. But it could take a very long time, or a big helping of luck. But time does greatly reduce the risk.
If I had the money, I’d put the full £20,000 into my ISA each year. And I’d do it for at least 10 years. Younger people with 20, 30-or-more years of investing time ahead could do a lot better.
And they’d be lowering the risk even more. Over timescales like that, the UK stock market has typically beaten cash saving by a huge margin.
Some numbers
So let’s see some figures. Over the past 20 years, FTSE 100 returns have averaged 6.9% a year.
Let’s be conservative and aim to take 5% a year from our final pot, from dividends. I think that’s plausible.
Someone who can use their full £20,000 ISA allowance every year could hit their target in less than 10 years, if they average that 6.9%.
Motivation
Now, future returns might be less than that, and we have to be prepared for that chance. And I can’t invest £20,000 a year personally. So it would take someone like me longer than that short time.
But for an investor with decades ahead of them, who could save maybe £5,000-10,000 a year, possibilities like this are encouraging, aren’t they?
