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£500 to invest per month? Think about turning this into that £20,000 passive income!

£500 to invest per month? Think about turning this into that £20,000 passive income!

£500 to invest per month? Think about turning this into that £20,000 passive income!

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Investing in UK and US shares can be a great way to build wealth. After a few decades, the accumulated amount of money (hopefully) may be enough to provide an abundant and reliable passive income.

Here’s what I would do to achieve a second income above £20,000.

Cancel tax

The first thing on my list would be to open an Individual Savings Account (ISA) and/or a Self-Invested Personal Pension (SIPP). I actually use both of these products to save on taxes.

Over the long term, these products could add tens of thousands of pounds to my wealth, possibly more. That’s because both the ISA and SIPP save me from paying a penny of capital gains tax (CGT) and dividend tax.

Please note that tax treatment depends on each client’s individual circumstances and may be subject to change in the future. The contents of this article are provided for informational purposes only. It is not intended to and does not constitute any form of tax advice. Readers are responsible for conducting their own due diligence and seeking professional advice before making any investment decisions.

Create a balanced portfolio

I have always strived to create a well-balanced and diversified portfolio of different types of stocks. With this strategy, I can customize my assets to suit my risk and return preferences, not to mention provide smooth returns over time.

Initially, a new investor might consider splitting a portfolio between growth and dividend stocks. I think 10-15 is a good number.

Greggs, Ashstead, And Games Workshop are examples of UK shares that investors might consider adding to their ISA or SIPP. Investors may also want to consider purchasing shares of fast-growing US technology companies such as Nvidia, TeslaAnd Amazon. While these types of growth stocks are volatile at times, they can lead to significant long-term stock price growth.

I think it makes sense to add a few dividend stocks into the mix to provide a steady stream of income to reinvest, allowing for compounding returns over time. Companies in this group include Aviva, HSBCAnd Halma.

Passive income £20k+

A quick and easy way to achieve this diversification is to invest in an exchange-traded fund (ETF). iShares FTSE 250 ETF (LFB: MIDD) is one such vehicle that provides a good combination of growth and dividend stocks.

As the name suggests, it invests in the entire FTSE 250 index, weighted according to market capitalization. This allows investors to effectively spread risk while providing a wide range of investment options.

Some of the fund’s largest holdings include a financial services provider. Alliance VitanGames Workshop hobby specialist and real estate investment trust. Tritax Big Box.

On the other hand, most of the index’s returns come from the UK, where economic conditions remain difficult. But overall, I still think the fund is still an attractive investment for long-term investors.

This FTSE 250 fund has delivered average annual returns of 8.4% since 2004. Past performance is not always a reliable indicator of future earnings. But if this continues, a monthly investment of £500 will turn into £507,618 over 25 years.

A pension fund of this size could then provide passive income of £20,305, based on a drawdown rate of 4%. And when added to a state pension, it can provide a significant cash flow for retirement living.