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How I’m planning to create a passive income with the FTSE 100

Building a second, passive income stream can be a great way to improve your finances without actually needing to take a second job. There are many different strategies you can utilise, including investing in assets such as real estate or starting a so-called “side hustle” such as selling items online or doing freelance work. 

Another great way to create a passive income stream is to invest in stocks and shares. For many, this might seem like a daunting prospect. The market can be quite volatile, and it’s widely believed you need to be an investment genius or Wall Street banker to become a successful investor.

However, here at the Motley Fool, we believe investing is for everyone. Today, I’m going to explain how you can create a passive income stream with almost no effort by just investing in the FTSE 100

Blue-chip index

Picking stocks can be a time-consuming process. Even if you spend hours researching a specific company, there’s no guarantee its shares will outperform the market. The professionals regularly get it wrong, even though they have teams of analysts and extremely powerful computers at their disposal.

With this being the case, I firmly believe if you’re just starting out, the best place to invest your money is in a low-cost FTSE 100 tracker fund.

Over the past few decades, the FTSE 100 has produced an average annual return for investors of around 8%. What’s more, the index currently supports a dividend yield of approximately 4.7%. This dividend yield is an aggregation of all the dividends paid by companies in the index and, therefore, is an extremely low-risk income stream.

While it’s true that you may be able to achieve a higher level of income investing in single stocks, one of the benefits investing in the FTSE 100 is you don’t need to worry about dividend cuts. For the FTSE 100’s dividend yield to fall to zero, every single one of its constituents would have to cut their dividends in one go, which is extremely unlikely.

Regular investing

Sticking with an index fund also means you have more time to focus on what matters most, and that’s making money to build your savings pot. The more money you contribute, the faster you should be able to generate a passive income. 

For example, according to my calculations, a saver putting away £1,500 a month for 10 years should be able to accumulate a savings pot worth £230,000, assuming this money is invested in the FTSE 100. 

A yield of 4.7% on this money would translate into an annual passive income stream of around £10,000. Saving £1,500 a month for 20 years would, according to my calculations, generate an annual passive income of nearly £27,000. 

That’s why I believe the FTSE 100 is a great tool to use if you want to create a passive income stream. 

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Rupert Hargreaves owns no share mentioned. 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.