Ever since I started my first job at age 15 I’ve dreamed of making a passive income. Not that work is bad, by any stretch. It’s satisfying being good at what you do. Creating and achieving short and long-term goals are good for the soul.
But passive income was still on my mind. Every time I didn’t feel like getting up one day, every time I’d rather be doing something, anything else.
It’s okay to not want to bother with work. Taking space for yourself is mega important. We only have one life on earth and getting stressed out about work and money shouldn’t dominate our lives. So that’s where passive income comes in.
Where my passive income started
There are many ways to passive income but I’ll start with the easiest. Investing.
It will take upfront capital in the form of savings. It’s scary to begin with, but it gets much simpler. And the very first thing I would do is to open a Stocks and Shares ISA. That’s because investing in such an ISA is tax-free.
Any gains that I make in my ISA from companies that I invest in? I don’t have to pay any extra tax.
Tax can blow a serious hole in your earnings potential. I pay a good amount of tax already on the income I make from writing these articles. So it’s really important for me to reduce my tax bill if I want to supercharge my passive income.
I came to investing pretty late in life. In fact, I was already nearly 40 before I took the plunge. It’s a source of great regret to me that I didn’t start sooner.
Why? Because the most powerful force for making passive income is called compound growth. And it gets stronger and stronger over time. Had I started much earlier, I could have been enjoying a healthy passive income by now.
So how do I choose investments to make the most of passive income? I look for a business that I think will succeed over a really long period of time. In the main, I avoid trendy shares, get-rich-quick schemes and companies that over-promise and under-deliver.
If I was starting all over again I don’t think I’d do much different. I’d start by seeking out the cream of the crop of the FTSE 100. These are the 100 most successful listed companies in the UK.
Success breeds success
Compound growth is a wonderful way to get passive income because anyone can use it. There’s no barrier to entry.
What I do now is invest my hard-earned cash in dividend-paying shares.
Again — and this is really important — I use my Stocks and Shares ISA to compound growth by reinvesting dividends. Every financial quarter, that’s every three months, I get a payment from the company in the form of a dividend.
But instead of taking out my passive income, I reinvest it to grow my shareholding. That’s the key. The longer I keep an investment in a good company? The more passive income potential I have.
Because I’ve got a long-term mindset, I think really hard before I make a new investment. I don’t chop and change or buy and sell lots of different companies. Instead I invest my time in researching the very best shares to buy.
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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 2020