I’d start investing £1,000 a month from July for £60,000 passive income!

Dr James Fox explains how to capitalise on tax-free investment allowances in order to earn a life-changing passive income.

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When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

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The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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Millions of us invest for a passive income. And while reaching our goals may appear daunting, with consistency, patience, and intelligent stock picking, it’s more than possible.

Work the ISA

The Stocks and Shares ISA is a hugely important vehicle for our investments, allowing us to grow our wealth in a tax-efficient manner.

The key benefit is that any income or capital gains earned within the ISA are exempt from UK income tax and capital gains tax.

This means that all dividends, interest, and profits generated from investments are completely tax-free, enabling us to maximise our returns.

And if I were to invest £1,000 monthly, it’d certainly make sense to use the Stocks and Shares ISA, which has an annual allowance of £20,000.

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.

Compounding for glory

£1,000 a month adds up quickly, but our portfolio grows even faster when we compound our investments. This means we reinvest our returns every year.

It might not sound groundbreaking, but the impact’s huge. It’s like the snowball effect, with an ever-increasing pot of money gaining pace year after year.

For context, assuming £1,000 of monthly contributions and a 10% return, it’d take me a little over six years to reach my first £100k. But it’d take just four years for my portfolio to grow from £100k to £200k. Then the next £100k jump would take just three years. After 21 years, my portfolio would be growing by £100k a year.

Using this example, it’d take me 22.5 years to reach £1m. That’s enough to generate at least £60,000 annually, referencing current dividend yields available on the FTSE 100.

Picking wisely

The problem is that many novice investors often lose money. That’s why we need to make wise investments. This normally means doing our research and finding well-reviewed investment opportunities.

In this example, I’m not taking a passive income for 22.5 years, so there’s no need to have a dividend-focused portfolio at this moment in time. Instead, I’d invest for growth, with a broad portfolio of stocks that could deliver above-average returns.

One of my favourite stocks to buy right now is Celestica (NYSE:CLS). This electronic component-maker and logistics provider is flying high and still represents an attractive investment opportunity.

The company, which helps clients design, manufacture, and optimise components for a wide range of sectors, has recently benefitted from a surge in demand for the artificial intelligence (AI) and data centre segment.

At 18 times forward earnings, it may look a little pricey. But that doesn’t tell the whole story. Earnings are growing by around 25% annually and this results in a price-to-earnings-to-growth ratio of 0.71.

The risk is that much of this promised growth doesn’t come to fruition. Some analysts have suggested that Celestica’s hyperscale partners are essentially front-loading their AI and data centre spending.

However, the consensus is that Celestica is in a prime position to benefit from supportive trends that could last for over a decade.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has positions in Celestica Inc.. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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