How to invest £500 a month in an ISA to target a passive income of £42,148!

Building a million-pound Stocks and Shares ISA is a realistic possibility with the right investing strategy. Here are the steps I’d take to hit this magical target.

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To my mind, ‘passive income’ is one of the sweetest keyphrases in the investor’s vocabulary. Who doesn’t love the idea of enjoying a second income without having to lift a finger?

There are multiple ways individuals can target a second income with little-to-no-effort. But to my mind, the best way to achieve this is by building a portfolio of shares, exchange-traded funds (ETFs), funds, and cash.

This method can provide the perfect balance of risk and reward. And, over time, it can provide an income stream that we can comfortably live off of.

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The plan

But how to get started? There’s a world of financial products we can use to try to build long-term wealth, and a wide variety of financial assets.

The first thing I’d do is open a tax-efficient Stocks & Shares ISA or a Self-Invested Personal Pension. After paying trading and management fees (if applicable), the rest of the earnings are mine. I don’t have to pay a penny to the taxman and, over time, this can add up to a princely sum.

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.

The next thing I’d do is create a balanced portfolio of FTSE 100 and FTSE 250 shares. I’d also get exposure to the US stock market with the S&P 500.

Such a strategy would allow me to spread out risk and smooth my returns over time. What’s more, these indices have provided exceptional returns in recent decades, giving me the chance to turbocharge my wealth.

A juicy nest egg

The Footsie’s delivered an average annual return of 8% since its inception during the past 30 years. The FTSE 250’s return stands at 11%, while the S&P 500 has provided a long-term return of around 10%.

Past performance is no guarantee of future returns. But if past performance continues, a £500 investment distributed equally across these indices would turn into £1,053,695 after 30 years.

Possible returns after 30 years.
Created with thecalculatorsite.com

I could then draw down 4% from this £1m+ nest egg each year for a yearly passive income of £42,148. At this rate, I could stretch my retirement fund out for 30 years.

A top FTSE stock

I could try to achieve this by spreading my monthly investment across three ETFs that track the FTSE 100, FTSE 250 and S&P 500. Alternatively, I might choose to buy individual shares instead of, or in addition to, this. This approach can help me to possibly achieve a market-beating return.

Ashtead Group‘s (LSE:AHT) a blue-chip stock I’ve added to my own portfolio. It’s delivered the best return of any current FTSE 100 share over the past two decades. I’m confident it will continue to be a strong performer as it continues to rapidly expand.

The company’s Sunbelt Rentals unit is the second-largest heavy equipment supplier in the US. With a large presence in Canada and the UK too, it’s capitalising effectively on the rising trend of customers renting hardware instead of buying it.

Encouragingly, Ashtead remains highly cash generative, and so it has the firepower to continue making profits-boosting acquisitions. Earnings may suffer if the economic landscape worsens and construction activity cools. But, on balance, I think this is a top Footsie stock to consider today.

Pound coins for sale — 31 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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.

Royston Wild has positions in Ashtead Group Plc. 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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