How £100 a month could turn into £6,500 a year in passive income

Whether it’s building wealth or earning passive income, getting into the right money habits early can have great results. It takes time, but the final outcome can be spectacular.

By putting £100 aside each month, I think it’s possible to generate £1,000 a year in passive income within a decade. And this could pick up to £2,900 after 20 years and £6,500 after 30.

The key to long-term wealth

Building long-term wealth takes two things. The first is regular investment and the second is achieving a decent return. 

When it comes to long-term compounding, investing earlier offers a big advantage — a £1,000 investment that compounds at 6.5% for 30 years reaches £6,991. But after 20 years, it’s only worth £6,552.

That might not sound like much, but it’s £400 less — around 40% of the initial stake. Other things being equal, it pays to invest earlier, rather than wait to deploy a bigger investment.

Equally, the rate of return is important – investing £100 per month for 30 years at 6.5% results in an investment worth £107,960. At 3%, the eventual result is just £58,260.

That means putting money aside regularly and achieving a good rate of return are incredibly important. And when it comes to the second, I think the stock market is the place to look.

The stock market

A 6.5% average annual return is enough to turn £100 a month into something that can generate £6,500 a year after 30 years. But achieving that result isn’t straightforward.

It would take a big increase in interest rates for either cash or bonds to offer that kind of return. The best I can find at the moment is just short of 5%. 

That’s not bad, but the difference between 5% and 6.5% can be huge over 30 years. In the stock market, however, I think there’s a much better chance.

The average return from the FTSE 100 over the last 20 years has been 6.89%. So even though past performance doesn’t guarantee future success, I don’t think 6.5% a year is unrealistic.

Finding stocks to buy

I think Admiral (LSE:ADM) shares are worth considering right now. Car insurance is something people don’t have much choice about buying, which means demand is generally resilient.

Inflation pushing up the cost of car repairs is a risk that investors need to take seriously. But the FTSE 100 insurer has some important long-term strengths.

Importantly, Admiral is one of the best in the business when it comes to underwriting. Over the last decade, it has consistently achieved better margins than its rivals.

This isn’t an accident – the firm’s telematics operation gives it a key data advantage over its competitors. And I think there’s a good chance this can result in consistent long-term profits. 

Dividends

One of the benefits of regular investing is the opportunity to build a diversified portfolio over time. The stocks that are attractive right now might not offer the best value next month.

I think Admiral shares are worth considering right now. The company’s dividend policy – which consists of a combination of regular and special distributions – is also interesting.

This is based on a combination of underwriting profits and excess capital on the firm’s balance sheet. This can fluctuate, but I think it’s worth considering for anyone targeting a 6.5% return.