Parking my money in a savings account is an attractive option today. But with interest rates beginning to fall, the savings rates on offer will steadily follow suit. I expect UK shares to become increasingly popular as an investment class over the next couple of years.
Investing on the stock market is riskier than holding cash on account. However, the returns can be spectacular. The FTSE 100 and FTSE 250 boast long-term average yearly returns of 7% and 11% respectively.
Here’s how I’d target a £20,000-plus passive income through a mix of cash savings and UK shares.
Open some ISAs
The first thing I’d do is open a couple of tax-efficient Individual Savings Accounts (ISAs). With the Cash ISA and Stocks and Savings ISA, I don’t have to pay a penny to the taxman on my capital gains or dividends. Over time, this can add up to a staggering sum of money.
The total amount anyone can invest across ISAs is £20,000 in any tax year. But this is more than enough for most of us — less than 10% of Britons max out their allowance each year.
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.
Devise a strategy
With my ISAs set up, I need to draw up a strategy to help me build long-term wealth. There is no ‘one size fits all’ approach, as we each have different investment goals and risk tolerance.
However, let’s say I’m targeting a £30,000 passive income after 30 years of saving and investing. With my Stocks and Shares ISA, I could build a diversified portfolio of FTSE 100 and FTSE 250 shares, with an equal investment in about 10-15 shares.
With a £300 monthly investment, I could — based on the average yearly returns of 7% and 11% for these indices — make £549,223 after 30 years.
With another £100 a month put in my Cash ISA, I would bump this total up to £618,627. That’s assuming I enjoyed an average 4% interest rate over the period.
And presuming I drew down 4% of my pot after those 30 years, I’d enjoy a bumper £24,745 passive income per annum
A FTSE 100 stock
Past returns are not a reliable guide of future performance. But Diageo (LSE:DGE) is the sort of FTSE 100 stock I’d buy to target a large long-term return.
To my mind, the drinks giant has a number of qualities that make it a robust buy. It has highly desirable brands such as Guinness and Captain Morgan, which allow the company to raise prices over time without losing customers.
Diageo enjoys excellent diversification too, which reduces risk and provides a range of growth opportunities. It has exposure to many different drinks categories (including beer, rum, vodka and whisky), and operates across a range of developing and emerging regions.
Finally, Diageo boasts formidable cash flows, which enable it to invest heavily in marketing and product innovation.
The business isn’t immune to economic downturns, as we’ve seen in the past year. And there are concerns over the long-term future of the alcohol business as Gen Z drinks less. But over the long term, I think it’s a stock well worth considering.
