My plan to earn £1,000 in passive monthly income

When it comes to passive income, I think £1,000 a month is a good goal to aim for.

It is a decent measure of income, which is higher than the state pension. But I think it can also be done for people who can save regularly and are willing to invest in stocks.

Best of all, by owning shares in the company, I can earn that income without any extra work. I have several stocks that pay dividends regularly and automatically into my account, sometimes without me even noticing.

Here’s how I’ll benefit from my target of £1,000 a month.

How to get there

To start with, I’ll use the commonly accepted ‘safe withdrawal rate’ of 4%. The idea behind this is that I can take out a percentage to live on passive income, and the original amount is likely not to lose much value.

Using this 4% figure, I would need a £300,000 nest egg to earn £1,000 a month. Let me save £500 a month to target that amount, this is how long it will take.

If I just keep my money in a bank account that doesn’t pay interest, it will take me 50 years to reach my goal. It’s a long time, but this option has the advantage of low risk.

My preferred option is to invest in a Cash ISA. Now my savings will give me a small percentage back every year depending on the interest rate. Today, I see most ISAs offer around 3% interest. With this, it will take around 31 years to reach this amount.

The best strategy for me, and the one that I personally use, is to invest in companies. The historical return of the main indices in the UK and US is about 10%. At a higher percentage, it would take just 18 years to reach £300,000.

What are the risks?

This strategy is not without risk. First, stocks can be volatile, so I should be calm enough to hold stocks during a crisis like the 2020 pandemic or the housing crash of 2008. Both stock markets are recovering, so anyone who sells below will suffer a huge loss.

Also, inflation will make money cheaper in the future. This is one reason why the ‘safe withdrawal rate’ is 4%, even though most investors expect higher returns from their stocks.

Finally, how I choose to invest will affect my returns. Index trackers that follow the market and average returns are good choices.

But if I invest in a certain company, I can take more risk for a higher return potential. For example, some profitable smart choices like Google, Apple, or AstraZeneca can reduce the time it takes to reach your £1,000 monthly income target.

The best choice

Either way, I believe that investing in stocks is the best option for my money. I will continue to put my savings into the company for potential wealth building.

Hopefully, one day it will give you a passive income of £1,000 a month or maybe even higher.