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I’d aim to turn an empty ISA into £3,057 monthly passive income

Senior woman potting plant in garden at home

When I think about passive income, it’s the word ‘passive’ that stands out to me. That is, making money without doing any work. 

Stocks are the perfect example of this. When I buy a stock, I click a few buttons on a website and that’s it. I don’t need to do anything else to get dividend payments or see my stocks rise in value. That sounds truly passive to me. 

If I had an empty ISA, I think I could use stocks to work towards a £3,057 income each month. In this article, I’ll explain exactly how I’d hope to get there even with just a £99 a month saving. 

Let’s start with the ISA. After all, if my account reads £0, I’m not thinking about a massive passive income one day in the future. I need to take a few baby steps first.

I’d aim to add £99 a month to the ISA. That would be a good starting point. It doesn’t sound like that much, only two digits. But these days, it’s the cost of a night out or a trip to a concert. And even at that amount, it could lead to big payments later on, as I’ll get to in a second.

So how is this going to work? Well, I’ll look to grow my savings by investing in a Stocks and Shares ISA. While this is not a sure thing, stocks in this country have a long history of excellent returns. The FTSE 250 index, for example, has an average return of over 10%. 

And of course, I get this income passively, with no extra work once I’ve bought the stock. 

Not for long

If I wanted to invest in UK shares, now would be a great time to start. The stock market in this country is at a low ebb and equities look cheap on many metrics. I still can’t believe the FTSE 100 forward price-to-earnings ratio has dropped to around 10. It might not stay that low for long.

As bullish as I am here, I will point out that this isn’t risk-free. Stocks can be volatile and there is also no guarantee that future returns from stocks will be similar to past returns. 

There are ways to lessen the risk. I could diversify across different companies and sectors to balance out the ups and downs. I could even invest in an index fund to give me the safety of investing in an entire market.  

Doing this, I would hope to see my ISA grow as companies earn profits. The stocks might pay me dividends, or I could see my stake rise in value as it grows. That will give me a passive income. 

Big passive income

How much can I get? Well, I said I’d aim for an income with £99 a month, so let’s see how that does with different rates of return. The following table shows a few examples. 

Looking at the highest value, a £36,678 yearly income would lead to a £3,057 monthly income. Not too bad from £99 a month. Although I will say that is at the high end if I want to keep my income long into the future.

Yearly passive income
6% 9% 12%
1 year £112 £169 £228
5 years £453 £728 £1,039
10 years £1,008 £1,758 £2,737
20 years £2,745 £5,790 £9,698
30 years £5,855 £15,332 £36,678

The post I’d aim to turn an empty ISA into £3,057 monthly passive income appeared first on The Motley Fool UK.

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John Fieldsend has no position in any of the shares 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.