Run an online search for ‘how to make passive income’ and a mass of suggestions will appear. But I’m confident few will be as truly fuss-free as making money from the stock market. If it’s done sensibly.
Today, I’ll explain how I’d go about generating over £900 a month for retirement from a starting pot of £20,000.
Cash is no match for stocks
As it happens, £20,000 is currently the maximum I’m allowed to put in a Cash ISA every year.
Now, I could just leave this money here and receive interest on it. However, even the best rate I could get at the moment is a little over 5%. That’s far better than it once was. But I also know that stocks have drastically outperformed cash over a very long timescale.
So let’s say I put that money to work in the latter. At the moment there are many ways of investing this cash to make passive income.
One option would be to buy dividend stocks from the start. If I invested 20,000 today at an average yield of 5%, I’d get £1,000 a year – the same as if I’d kept my money in the Cash ISA.
In real life, we know that dividend yields are always changing. That income can never be guaranteed either.
But what if I didn’t have the time or energy to research individual companies and was prepared to wait for more passive income further down the road?
Own the world
Well, I could invest in an exchange-traded fund that simply tracks the market return from stocks all around the world. When averaged out over a long period, that return has been in the high-single-digits every year.
For this example, let’s say that annual return is 8%. If I invested £20,000 today and left it alone to compound, I’d have a monster pot of £218,715 after 30 years.
Granted, that performance isn’t set in stone. The calculation doesn’t take into account any fees either. And, yes, that amount won’t seem quite so much when we take inflation into account. But it just shows how much my money could grow over time.
Show me the money!
If I’m still here in 30 years, I’ll probably be retired. With no job to fall back on, I’d now be more interested in looking for those very dividend stocks I mentioned earlier to supplement my pension. I’d certainly have a lot more time to do the research!
If I bought a bunch of shares with an average yield of 5%, at this point, using my near-£219k nest egg, I’d generate the equivalent of £911.31 a month. In the meantime, my holdings might increase in value as well.
While no one knows how the financial landscape will look three decades from now, that sort of money will probably come in handy.
Worth the wait
By now, you’ve probably noticed a caveat that Fools like me must accept. in order to get my hands on that sizeable passive income stream, I need to be patient.
Thankfully, there’s one way to speed things up. That’s aiming to put money to work every month on top of that original £20,000 investment.
The more money left to compound, the greater the potential return and the more passive income I should eventually receive every month.
