Turning an empty ISA into £98,154 of extra income every year!

I’m not sure of anyone who’d say ‘no’ to some extra income. Whether we’re struggling to make ends meet or doing well, there’s always something we want but just can’t afford right now.

Of course, there are plenty of ways to earn a second income. I could take up part-time work, or I could invest in a buy-to-let property. However, from experience, the easiest and often most lucrative way is investing in stocks and shares that pay a dividend.

Here’s how I could turn an empty ISA into a passive income-generating machine.

Getting started

Stocks and Shares ISAs are beneficial for passive income generation because they offer tax-free growth and tax-free dividends. There’s no need to declare on tax returns, flexibility in switching investments without capital gains tax, and exemption from inheritance tax.

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.

So if I haven’t already opened an ISA, I’m going to need to do that. All the main brokerages such as Hargreaves Lansdown offer accounts with an ISA wrapper. However, if I’m only investing a small amount of money, I might be better off finding a brokerage with smaller fixed fees than HL.

Realism, discipline and wise choices

After opening an account I then need to determine my financial goals. I need to clarify what I want to achieve with my ISA, such as when I’d be looking to start taking a second income from my portfolio. I’ve got to be realistic, it’s not happening overnight.

Then I need to evaluate my budget and savings capacity. I must assess my financial situation to determine how much I can contribute to my ISA on a regular basis, considering my income, expenses, and other financial obligations.

If I have no starting capital, I’ll want to be making monthly contributions to grow my portfolio while benefitting from pound-cost-averaging. To make saving easier and consistent, I should arrange automatic transfers from my bank account to my ISA.

Finally, I need to start by making wise choices. I need to do my research when buying stocks and take advantage of stock picks when I can. If I make wild decisions and choose poorly, the value of my investments could fall instead of rise.

Compounding

So just how could I achieve £98,154 a year in passive income? Well, it all depends on compound returns, how much I’m willing to invest every month, the success of my investments (annualised return), and the length of time before I start withdrawing.

I could start with as little as a £2 a day, or £60 a month. Investing with small amounts of money has become easier since the emergence of zero-fee platforms and fractional shares. But for example, let’s imagine I’m contributing £250 a month. Here’s what I could achieve with varying annualised returns.

Of course, if £250 a month is too much for me, I could look to split the burden with my wife or, of course, reduce it. Moreover, I could also look to increase my monthly contributions in line with inflation, assuming the payments become more comfortable over time.