£7,000 in savings? Here’s what I’d do to turn that into a £1,160 monthly passive income

There are multiple ways that the modern investor can try to make a life-changing passive income. But I believe the best way to do this could be by building a portfolio of UK shares.

Stock investing doesn’t require vast sums of cash at the beginning to set things in motion. And few other asset classes have provided the sort of stunning long-term returns as equities.

If I invested £7,000 in British stocks today, I’d have a good chance of eventually turning this into a £1,160 monthly passive income. Here’s how I’d aim to do this.

Sidestep the taxman

The first thing I need to do is think of ways to maximise my returns.

Choosing a broker with low trading fees and management charges is one way. But selecting a financial product that eliminates any tax payments is the biggest gamechanger to creating long-term wealth.

The Stocks and Shares ISA and Self-Invested Personal Pension (SIPP) are excellent (and incredibly popular) ways to do this. The ISA allows me to invest £20,000 each tax year without having to pay a penny in tax on capital gains or dividends.

The SIPP, meanwhile, typically allows an individual to invest up to £60,000 a year, depending on their earnings.

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.

Target the FTSE 100 and FTSE 250

The next thing I’d do is concentrate on buying FTSE 100 and FTSE 250 shares.

I buy shares from across the London stock market. But the vast majority of my cash is used to purchase shares from the UK’s biggest indexes.

Equities from the Alternative Investment Market can provide stunning returns. But broadly speaking, shares on the FTSE 100 and FTSE 250 tend to be more stable, from an investment perspective. This makes the investing process far less stressful and provides me with a reliable return over time.

On average, British investors earn a 7.5% annual return with Footsie shares. The FTSE 250 provides an even larger 11% return.

Those are pretty excellent numbers in my opinion. And, if this trend continues, a £7,000 lump sum invested equally across these indexes would turn into £279,142 over 40 years. That’s the equivalent of a £1,163 monthly income, if I drew down 5% each year.

Funds vs stocks

One way to target these returns could be by buying an index-tracking fund. Doing so could allow me to hit these numbers instantly without having to do much homework.

But I’m not afraid to put in some hard graft. And by researching individual stocks to buy, I stand a chance of making an even better return than what a FTSE 100 or FTSE 250 fund could provide.

TBC Bank Group (LSE:TBCG) is one top stock I think might deliver stunning returns. And today it is on sale: the company trades on a forward price-to-earnings (P/E) ratio of 5.3 times. It also carries a huge 6.7% dividend yield.

TBC is the largest bank in Georgia, an emerging market that is tipped to continue rapidly expanding. This provides financial services companies like this — whose profits have soared 121% during the past five years — with more considerable growth opportunities.

While vulnerable to economic downturns, I believe this FTSE 250 share could deliver stunning returns over the long term. A portfolio packed with stocks like this could, over time, provide an exceptional passive income.