There are many ways that individuals can try and make a tasty passive income today. Every day I have fresh new ideas on how to supplement my earnings dropping into my inbox.
But I’m unshaken in my belief that share and fund investing is the best way for me to build a second income.
Even setting aside just £50 a week could deliver me a healthy extra income. Here’s how I’d look to achieve this.
Reduce costs
I think £50 is a decent amount to start out with. However, it isn’t the largest, either. And so I need to take care to maximise every ounce of profit to achieve a decent return.
So investing in a tax-efficient financial product is the first thing I need to do. In the UK, I can do this with an Individual Savings Account (ISA) — the two options available to me are the Stocks and Shares ISA and the Lifetime ISA.
Alternatively, I can use a Self-Invested Personal Pension (SIPP). With any of these products, I don’t have to pay a penny to the taxman on any capital gains or dividend income. I just need to make sure their restrictions don’t impact my personal goals.
SIPPs, for instance, don’t let me withdraw any cash until my late 50s.
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.
Tax isn’t the only cost I’ll be looking to avoid. With my £50 investment, I’ll also be looking to reduce the costs of holding and building my portfolio of shares.
To this end, I’ll shop around to find the best broker that fits my needs with the lowest trading and management fees. The market is highly competitive and so I have a lot of choice here.
Furthermore, I’ll also try to minimise the number of trades I make. If I invest £50 each week and pay a £5 trading charge, I’ve ‘lost’ 10% straight off the bat.
A better strategy could be to save up and invest £217 a month, for which that £5 charge would be less destructive to my wealth.
A top ETF
I could also cut costs by investing in an exchange-traded fund (ETF). This would allow me to build a diversified portfolio without having paying a trading charge for lots of separate shares.
The SPDR MSCI World UCITS ETF (LSE:SWRD) is one ETF I’d consider buying. As the name suggests, it gives me exposure to many different regions, which in turn helps me manage risk.
In total, it holds shares in 1,400 separate companies. And with an ongoing charge of 0.12%, it’s also one of the most cost-effective global ETFs out there.
With a high weighting of tech stocks like Nvidia and Apple, it could help me capitalise on fast-growing phenomena like artificial intelligence (AI) and cybersecurity too. That’s even though its denomination in US dollars leaves me vulnerable to adverse exchange rate movements.
A £20k+ second income
The fund has delivered an average annual return of 13.2% over the past five years. If this continues, it would turn my £217 monthly investment into £505,580 after 25 years.
I could then draw down 4% of this amount each year for an annual passive income of £20,223.
Past performance is no guarantee of future returns. But funds like this could prove a great way to build a terrific passive income.
