There are a lot of things one can do with £50,000 in savings. Paying off debt, buying a house, and saving for retirement are some options.
Of course, this kind of money could potentially be used to build a healthy passive income stream. With that in mind, here’s how I’d aim to turn £50k into £20k of income per year.
Step 1. Growing the capital
If I wanted to generate £20,000 per year in income from my savings, the first thing I’d have to do is grow the money.
Assuming I could obtain a 5% yield in the future (more on this below), I’d need to grow the £50k into around £400k (£400,000 x 0.05 = £20,000).
How could I do this?
Well, one way I could potentially do it is by investing it in the stock market.
Over the long term, the stock market has provided returns of around 7%-10% per year for investors.
If I could achieve a return of 9% per year, I could grow my £50,000 into £400,000 in around 24 years.
If I was adding another £10,000 per year to my savings, I could potentially hit my target in just 14 years.
Of course, to achieve this kind of return, I’d have to build a proper portfolio. One or two stocks isn’t going to cut it.
I’d first invest in a selection of global investment funds. These would give me access to a wide range of stocks listed around the world, reducing both stock-specific and geographic risk.
Once I had built a solid foundation for my portfolio, I’d add in some individual stocks in an effort to boost my returns.
It’s worth noting that stocks are riskier than funds. However, they have the potential to provide larger gains.
Just look at Apple. Over the last decade, it has turned $10,000 investment into around $125,000. There are not many funds that have produced that kind of return for investors.
I’ll point out that I’d try to invest as much of my £50,000 in tax-efficient investment accounts (such as the Stocks and Shares ISA) as possible.
The less tax I was paying on my investments, the faster I could potentially get to my goal.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Step 2. Generating passive income
Once I had hit my £400,000 goal, I’d then switch my strategy from growth to income.
In other words, I’d move my money out of growth assets, and into income-generating investments such as dividend stocks, bonds, fixed-term savings, and high-interest savings accounts.
I would think that generating a 5% yield from a diversified portfolio of income-generating assets would be very achievable. However, there are no guarantees here, of course.
If I could obtain a yield of 5% on my money though, I’d pick up passive income of £20,000 per year.
