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Earning a life-changing passive income is one of the ultimate goals of any investor. Who wouldn't want to earn a sustainable stream of money with little to no effort?
For some, it seems like an impossible dream. But in practice, anyone who commits to investing regularly has the opportunity to earn a substantial second income over time.
Here's how you would try to earn a passive income of over £23,000 by investing just a couple of hundred pounds each month.
ax tax
The first thing I would do is open a tax efficient investment product. In the UK, we predominantly talk about the Individual Savings Account (ISA) and the Self-Invested Personal Pension (SIPP).
With both financial products, I have the opportunity to invest in a wide range of different assets. We are talking about stocks, bonds, funds and trusts, for example. Alternatively, I can just keep my cash.
The good thing is that I don't have to pay a single cent to the treasury for capital gains, dividends or interest. In the long run, this can mean a lot of cash.
Official forecasts suggest ISA holders saved £6.7bn in tax in the 2023/24 financial year alone.
Please note that tax treatment depends on each client's individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any type of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
Build a diverse portfolio
Next, I would prioritize investing in shares using a stocks and shares ISA, due to the superior returns I can expect. I'll talk more about this in the next section.
Investing in stocks means I take on more risk than, say, keeping my money in cash. But that's okay. I can still comfortably manage risk by buying a wide range of stocks from different industries.
I would also buy some exchange-traded funds (ETFs) to reduce my risk. This could give me exposure to hundreds of companies at a stroke and at the same time invest my money in other areas like the bond market.
Finally, I would keep a small percentage of my money in a cash ISA, for easy access to capital and for risk reasons.
Target the FTSE 100 and FTSE 250
Since most of my cash is allocated to stocks, I would focus more specifically on buying FTSE 100 and FTSE 250 Share. Over the past few decades, these indices have provided an excellent average annual return of 9.3%.
gold producers centamine (LSE:CEY) is one of those companies I would buy into my stocks and Shares ISA. this is one of London Stock ExchangeIt is one of the largest mining operators, with a flagship mine in Egypt and several exploration assets elsewhere in Africa.
There is a risk here, as commodity prices can be volatile. But I think this is reflected in Centamin's low valuation. It trades on a price-to-earnings (P/E) ratio of just 8.6 times.
In fact, now could be a good time to invest in gold stocks given the current price development. The yellow metal is up 13% since the start of 2024 and continues to hit regular all-time highs above $2,400 an ounce.
Past performance is not always a reliable guide to future returns. But if that long-term average of 9.3% for the FTSE 100 and FTSE 250 continues, a monthly investment of £200 in shares like this could return £584,781 after 30 years.
This would then give me an annual passive income of £23,390, assuming I withdrew 4% of my pot each year.
