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How I’d use £250 a month to create passive income

·3-min read
Girl and father putting coin into piggy bank, sitting on sofa at home

Creating passive income today could change your life. It could be the difference between being able to enjoy retirement and having to slog away working past 65.

I know which outcome I’d prefer.

Not that I don’t love working. As my mum says, “It’s good to feel useful. People have to have somewhere to go every day.” But she would say that. She’s happily retired and splits her time between visiting her grandkids and gardening. Bliss!

Passive income wins

It’s relatively simple to start building up passive income streams by investing in the stock market. There’s a wonderful thing called dividend income, where big companies pay out a percentage of their profits each year to shareholders. The longer I own a solid blue-chip share like GSK or Tesco, the larger shareholding I can build. And the more shares I own? The more dividends I get.

Compound growth is a virtuous circle. Each year I receive a certain proportion of dividends, called ‘yield’. If it’s a good company, it will try to increase the yield it pays me each year. And if instead of paying my bills with those dividend cheques, I reinvest? I grow my holdings of that business, and get more dividends this year than I had the year before.

This is a pretty simple rinse and repeat strategy, whether I have £250 a month, £25, or (I wish) £2,500.

Avoid tax

Tax avoidance is perfectly legal. It’s a natural state of affairs to want to work within the system to my own benefit. And happily, the government recognises that it’s better to get people saving and investing for passive income than not. That’s why they introduced ISAs in 1999.

Tax evasion, by contrast, which involves trying to conceal income from the taxman, is illegal. Don’t evade tax you owe. And don’t try to hide from HMRC. They will find you.

As part of my tax avoidance plan, I can open a Stocks and Shares ISA and put £20,000 of my income or savings into it each tax year. That way, I’m building up a passive income generator with every year I keep it open. Consistency is the key, really.

Cornerstone investing

Personally I split my investments into two camps. On one hand I have dependable blue-chip dividend payers. If I had £250 a month to start creating passive income, I’d put around £200 (80%) here. I know these businesses aren’t going to go bust overnight. They’re not particularly exciting. But they are a cornerstone of my investing strategy.

On the other hand, I allocate 20% to higher-growth, riskier shares. These businesses could go broke, or fail. They are more of a moonshot. But if I know that going in? They are less likely to destroy my passive income plan.

And I subscribe to a regular investing plan. If money is scheduled to come out of my account each month straight into my ISA? It becomes normal. I don’t miss that £250 a month. Passive income doesn’t have to be complicated. And I can start today.

The post How I’d use £250 a month to create passive income appeared first on The Motley Fool UK.

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Tom Rodgers has no position in the shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline and Tesco. 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.

Motley Fool UK 2021

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