Invest €500 per month? Consider turning that into a £20,000 passive income!

Investing in UK and US shares can be an excellent way to create wealth. Over decades, the pot of money (hopefully) built up could be enough to provide an abundant and reliable passive income.

This is what I would do to achieve a second income above €20,000.

Abolish taxes

First on my list would be opening an Individual Savings Account (ISA) and/or a Self-Invested Personal Pension (SIPP). I actually use both products to help me save on taxes.

In the long term, these products could increase my wealth by tens of thousands of pounds, maybe even more. This is because both the ISA and SIPP save me from paying a penny in capital gains tax (CGT) and dividend tax.

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

Build a balanced portfolio

I have always strived for a well-rounded and diversified portfolio with different types of stocks. This strategy allows me to tailor my investments to my risk and return preferences, not to mention create smooth returns over time.

To start, a new investor might consider building a portfolio split between growth and dividend stocks. I think 10-15 is a good number to aim for.

Greggs, Ashtead, And Games workshop are examples of UK shares that investors can consider adding to their ISAs or SIPPs. Investors may also consider adding to their holdings with fast-growing US technology stocks Nvidia, TeslaAnd Amazon. While these types of growth stocks can be volatile, they can provide significant share price appreciation over the long term.

I think it makes sense to add some dividend stocks on the side so that a steady stream of income can be reinvested, helping to compound profits connection over time. Companies in this category include Aviva, HSBCAnd Halma.

A passive income of £20,000+

A quick and easy way to achieve such diversification could be to invest in one exchange traded fund (ETF). The iShares FTSE 250 ETF (LSE: MIDDLE) is one such instrument that offers a good mix of growth and dividend stocks.

As the name suggests, it invests in the entire FTSE 250 index, with weightings based on market capitalization. This allows investors to effectively spread risk while offering a wide selection of investment options.

The fund’s largest holdings include financial service providers Alliance Witanhobby specialist Games Workshop and real estate investment fund Tritax big box.

On the other hand, most of the index’s revenue is generated in Britain, where economic conditions remain difficult. But on balance, I still think the fund is an attractive investment for long-term investors.

This FTSE 250 fund has achieved an average annual return of 8.4% since 2004. Past performance is not always a reliable indicator of future returns. But if this continues, a monthly investment of £500 in it would return £507,618 over 25 years.

A pension pot of this size could then provide a passive income of £20,305, based on a 4% withdrawal rate. And in combination with the state pension, this could provide a significant cash flow that one can live on after retirement.