Wouldn’t it be lovely to make some passive income in 2024? Considering the ongoing cost- of-living crisis, I’d certainly say so. And even an initial small stream of money would be welcome for most households.
The good news is most can achieve just that! The latest data from the Office for National Statistics reveals that the median monthly household savings is £180. And that’s more than enough to kick-start an income-producing investment portfolio.
Investing in UK shares obviously comes with risk. Not every stock delivers impressive returns, and a badly built portfolio can actually destroy wealth rather than create it. But there are powerful tactics even novice investors can use to try and avoid such mistakes.
So with that in mind, let’s explore how to turn a £180 monthly investment into a £10,000 passive income.
Crunching the numbers
Let’s start by setting some targets. If I want to earn £10,000 a year passively, how much does my portfolio need to be worth?
Let’s follow the 4% rule used by most financial advisors. In simple terms, this rule states that investors shouldn’t withdraw more than 4% of the value of their portfolios each year. That way, wealth can continue to grow even when taking out profits.
So at 4%, a £10,000 passive income would require an investment portfolio worth £250,000. Needless to say, that’s quite a bit of cash. And by simply saving £180 a month, it would take 115 years to accumulate – ouch!
Fortunately, this journey can be massively accelerated through the magic of compounding. On average, the stock market delivers returns of around 8% a year. And assuming this continues into the future, investing £180 at this rate would reach the £250,000 threshold in just under 30 years.
Seeking bigger rewards
Three decades is obviously a significant improvement compared to over a century. However, as previously stated, this is based on the assumption that the stock market continues to deliver its historical average performance. And that’s far from guaranteed.
Therefore, while it does entail greater risks, picking individual stocks may prove to be the wiser move. By owning individual businesses, investors can focus their portfolios on only the best companies in the world. And over the long run, that’s a proven strategy for generating market-beating returns.
Take Halma (LSE:HLMA) as an example. The conglomerate safety, monitoring, and life sciences enterprise has been consistently delivering impressive growth for decades through a bolt-on acquisition strategy. And as safety standards have and continue to rise thanks to regulatory intervention, management hasn’t exactly been short on demand over the years.
So it should come as no surprise that it’s one of the best-performing businesses on the London Stock Exchange over the last 30 years, delivering an average 13% annualised return. At this rate, the journey to £250,000 would only take roughly two decades instead of three.
Of course, past performance doesn’t guarantee future returns. And in the case of Halma, the firm has plenty of risks to tackle, from a shifting regulatory environment to potential underperformance of expensive acquisitions. But by building a diversified portfolio of quality companies, these risks can be mitigated and help keep a portfolio on track.
This post was originally published on Motley Fool
