When it comes to income shares, it's hard to look past the FTSE 100. The huge Footsie firms offer me impressive payments if I invest in them. This passive income could then help me build wealth.
Let's say I wanted to target a £1m net worth with income shares. If I was starting from scratch, I think I could hit that figure by investing £327 a month. Here's how.
With some basic maths, I can show how £327 monthly potentially turns into £1m. The calculation is simple, but it relies on two important factors.
First, how long would I be investing? I'm around 30 years from retirement age, so that figure seems as good as any. I'd be pretty happy to hit a million by then. If I wanted to hit that target in fewer years, I'd need to invest a higher amount.
Second, I need to estimate a rate of return from my income shares. Historically, the average return of the huge FTSE 100 companies is around 8%. The return of smaller, more UK-focused firms on the FTSE 250 is around 10%. So those give me a decent starting point.
Of course, I subscribe to the Foolish approach where sensible, well-researched investments can lead to higher-than-average returns over the long run.
By doing this, I could aim for a higher average return of 12% from my income shares. That small increase makes a big difference over time.
There's some risk to this approach, and no investment is ever guaranteed a return. I have to accept that my investments might under-perform or even fail. I'll aim to balance this risk by diversifying. I won't buy shares in just one company, but 10, 20 or perhaps more. This gives me a buffer in case of a bad pick or two.
Here's what I get by plugging the numbers into an online investment calculator. I've included 15, 20 and 25-year periods for comparison.
Investment amount to reach £1m net worth
It seems unbelievable that a few hundred pounds a month can get to a million like that. But that's just the compound interest doing its stuff. And this isn't pie-in-the-sky theory either, thousands have already made it to a million in Stocks and Shares ISA accounts.
In reality, I don't expect I'll save and invest the same amount every month for three whole decades. Likewise, £1m might not be a target I ever reach.
Instead, I look at this as inspiration. If I keep in mind how powerful investing in income shares is? I'll be more motivated to continue to drip-feed savings into them.
And even if I got to something like £250,000, that might seem small in comparison. But it's still £10,000 a year at a 4% withdrawal rate. And with a bit of luck, I'd still have the full amount for a rainy day, or simply for something to leave behind for loved ones.
The post I'd drip-feed £327 a month into income shares to try for a million appeared first on The Motley Fool UK.
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John Fieldsend has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.