Generating £500 a month in passive income can help accelerate the journey to financial freedom. And that’s a goal many individuals understandably share.
While plenty of strategies exist to establish such an income stream, investing is arguably the least time consuming. Of course, that doesn’t mean it’s easy. There are still plenty of caveats to consider and preparations to be made.
So with that in mind, let’s go over the three main steps.
1. Build up capital
After setting up a brokerage account, it’s time to fund it. Investing in the stock market requires capital. Fortunately, the amount needed to get started is nowhere near as high as it used to be.
Thanks to the invention of low-to-no commission trading along with fractional shares, it’s possible to get the ball rolling with less than £100.
Obviously, investors are going to need more in the long run. After all, aiming for £500 a month passive income means a portfolio needs to generate £6,000 a year.
For reference, the FTSE 100 has historically yielded total annual returns of around 8%. And unless someone knows how to pull off a 5,900% yearly return consistently, £100 isn’t going to cut it. However, drip-feeding £100 a month might.
By consistently saving some money from a monthly pay cheque, investors can build up capital over time while simultaneously tapping into the benefits of compounding returns.
2. Pick high-quality businesses
While the stock market in general trends up over long periods of time, not every company is destined for gains. In fact, the majority fail to deliver any meaningful growth or value creation. And there are plenty of examples of businesses going bust.
Don’t forget, as shareholders, investors become part owners in an enterprise run by a (hopefully) talented management team on their behalf. The better the business, the more shareholder value is built in the long run, and the higher the investment returns will be.
With that in mind, it only makes sense to invest in the best when pursuing a sustainable passive income stream.
But how exactly do investors find these opportunities? Picking top-notch stocks is a time-consuming and sometimes challenging process. But The Motley Fool has written a free guide to help investors get started.
3. Start earning passive income
Once investors have added the best stocks to their portfolios, waiting is the only thing left to do. Companies don’t suddenly grow overnight. It takes time, and between earnings reports, share prices can be quite volatile. But providing an investment thesis is correct, wealth will eventually start to accumulate.
Having said that, it’s critical to remember that nothing is ever guaranteed. Even the best businesses can become disrupted, even if it’s not their fault. And that often translates into sudden downward share price movements. Just think back to what happened in the 2020 global pandemic.
If an investor were to match the performance of the FTSE 100, consistently investing £100 each month, that would theoretically lead to a portfolio worth approximately £124,856 within 28 years.
Careful selection of dividend stocks can easily produce a 5% yield. And withdrawing this dividend income would translate into a monthly passive income of just over £520. But for investors capable of investing £400 a month, this objective can potentially be hit in half the time.
