Stock market

£7,000 in savings? Here’s what I’d do to turn that into £1,160 a month in passive income.

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There are a number of ways that the modern investor can try to create life-changing passive income. But I believe the best way to do this is by building a portfolio of UK shares.

Stock investing doesn’t require a large initial investment to get things moving. And few other asset classes have delivered as spectacular long-term returns as equities.

If I invested £7,000 in British stocks today, I would have a good chance of eventually turning it into £1,160 a month in passive income. Here is how I want to do it.

Back off the taxman

First I have to think of ways to maximize my return.

One way is to choose a broker with low trading fees and management charges. But choosing a financial product that eliminates tax payments is the biggest game changer for long-term wealth creation.

A Stocks and Shares ISA and Self-Invested Personal Pension (SIPP) are great (and incredibly popular) ways to do this. The ISA allows me to invest £20,000 each tax year without paying a penny in tax on capital gains or dividends.

A SIPP, meanwhile, typically allows an individual to invest up to £60,000 a year, depending on their earnings.

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content in this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for doing their own due diligence and seeking professional advice before making any investment decision.

Target the FTSE 100 and FTSE 250

The next thing I would do is focus on buying FTSE 100 And FTSE 250 Shares

I buy shares from across the London Stock Market. But the bulk of my cash is used to buy shares from the UK’s biggest indexes.

Equities from Alternative investment market Can provide excellent returns. But broadly speaking, shares on the FTSE 100 and FTSE 250 tend to be more stable from an investment perspective. This makes the investment process much less stressful and gives me reliable returns over time.

On average, British investors earn 7.5% annual returns with Footsie shares. The FTSE 250 provides an even higher 11% return.

These are very good numbers in my opinion. And, if this trend continues, a lump sum of £7,000 invested equally in these indices will turn into £279,142 over 40 years. This equates to a monthly income of £1,163, if I draw down 5% each year.

Funds vs Stocks

One way to target these returns is to buy an index tracking fund. Doing this allows me to hit those numbers quickly without doing much homework.

But I’m not afraid to put in some hard graft. And by researching the individual stocks to buy, I stand a better chance of a return than a FTSE 100 or FTSE 250 fund could provide.

TBC Bank Group (LSE:TBCG) is a top stock that I think can deliver fantastic returns. And today it’s on sale: the company trades at a forward price-to-earnings (P/E) ratio of 5.3 times. It also carries a huge 6.7% dividend yield.

TBC is the largest bank in Georgia, an emerging market that is reported to be expanding rapidly. This provides such financial services companies – whose profits have grown by 121% over the past five years – with greater opportunities for growth.

Despite the economic downturn, I believe this FTSE 250 share can deliver excellent returns over the long term. A portfolio full of such stocks can, over time, provide extraordinary passive income.

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