Making passive income outside of my main job provides me with an extra cushion when it comes to my finances. In an ideal world, it shouldn’t take up too much of my time. Yet it takes a lot of pressure off me as it diversifies my different income streams. The stock market remains one of the best ways (in my opinion) to do this.
How to make income from the market
I’m going to set the goal of making £450 a month from the stock market. There are two main ways that I can aim to make this a reality.
I can buy a host of stocks that pay out a dividend. In this regard, the payment is income I can bank. Early on, it makes sense to reinvest the money and buy more shares. Thanks to compounding, my overall portfolio will grow in value, paying out a larger amount of income year-on-year.
The other way is to invest in growth stocks. Even though these types of firms don’t usually pay dividends, I’d expect the share price to be rising faster than the FTSE 100 average. Over time, I can trim profits and use this as income. For example, if I invested £1,000 in a stock and it doubled in value to £2,000, I could take £1,000 as profit and leave the original £1,000 invested.
Getting the numbers together
I’m going to assume I’ll use a mix of the two strategies to get to £450 a month. Now I need to focus on the practical steps.
Before I talk about money, I need to settle on an expected annual yield. After considering the dividend yields of some top stocks and the growth prospects of some firms, I’ve settled on 7%.
A large part of how much I’d need to invest depends on how much I can afford right now! If I had £77,142 in the bank, I could invest this straight away. In theory, this would pay me £450 a month using my 7% projected yield.
It’s unlikely I have this amount ready to go. So the other option is that I invest £400 a month. It’ll take me just under 11 years to reach an investment pot of £77,142. After this point, I wouldn’t have to put in another penny and could enjoy the £450 in income.
Key points to remember
Whenever I’m thinking about potential income, I have to remember that it’s just that – potential! Forecasting years into the future isn’t an exact science. My 7% target could turn out to be overly ambitious. This would reduce my income potential.
There’s also no guarantee the growth and income stocks I pick perform that well. Even though this is a risk, I’ll try and mitigate this via investing in a wide range of companies. This diversification should reduce the chance of me underperforming.
