Passive income sounds like an attractive thing to many people. The basic idea is to get paid without being present to earn. Imagine that! Getting paid without all the blood, sweat, and tears – I’m all for it!
How I’d achieve a passive income
Some people achieve passive income in their lifetimes by getting royalties, long after they’ve done the initial work. I’m thinking of book authors, journalists, songwriters, scriptwriters, recording musicians, financial advisors, inventors, and other professional activities.
Others get it from investments in real estate property and business. And the easiest way to get passive income from business activities is by buying the shares of public limited companies and share-backed investments, such as collective share funds. Indeed, that’s my preferred choice, and I think it’s a route to passive income available to most people.
Indeed, with as little as £30 a week, I can begin to build up an investment fund that will be capable of paying me a meaningful passive income later. Perhaps I could draw that passive income to help finance my retirement. Or, if my investments do well, I could retire early and live on my passive income.
The most convenient way for me to invest £30 a week is to pay it monthly, which is a figure of £130. That’s because my earned income arrives monthly. So, it’s a simple procedure to pay the £130 across to my investments after the earned money arrives in my current account.
For me, the most attractive place to invest is within a Stocks and Shares ISA. I like the tax advantages and the freedom of choice when it comes to withdrawing the money later.
I won’t have to worry about income tax if I take my passive income from an ISA. And I think that situation will work well alongside the income I’ll receive from the State Pension in retirement.
Where I’d invest my £30 a week
To begin with, I’d invest in managed funds and index tracker funds within my ISA. Those collective vehicles will usually accept single contributions as low as £25 with low transaction costs. So, my £130 will be accommodated nicely each month. I’d aim to spread the monthly investment between three or four individual funds for extra diversity.
However, the shares of many individual companies will back up each fund. So, my diversification will be comprehensive at a low cost. And that’s something that’s hard to achieve in the early stages of a programme of investment if I invest in the shares of individual companies.
In the investment building stage, I’d select the accumulation version of each fund. That would ensure the dividend income is automatically ploughed back into my investments. And in that way, my returns will compound over time. Later, when I need passive income, I could select the income version of my funds.
However, many investors seek to achieve higher returns from the stock market by investing in the shares of individual companies. And as my invested funds grow, I’d do the same after carrying out comprehensive due diligence and research into each investing opportunity.
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Kevin Godbold has no position in any 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.