Would you like to know how to earn £2,000 in tax-free monthly passive income—and keep up with inflation so your money never loses value?
Stick around, because we’ll not only show you how to do it by investing with an ISA (i.e. Individual Savings Account) but we’ll also share two bonus ways to hit that same goal!
Today, we’re sharing how you can use an ISA to create £2,000 in monthly passive income while factoring in inflation—because, let’s be honest, £2,000 today will not be worth the same in 20 years.
As you read, remember, that it's not too late for you to start.
Let’s jump right in! 😀
Invest THIS In an ISA to Earn £2,000 Monthly Passive Income (Tax-Free!)
Let’s start with why £2,000/month is such a powerful number.
Part 1: Why £2,000 Tax-Free is Life-Changing
For most people, this amount could cover major expenses like rent, a mortgage, or even a significant chunk of their family budget.
And here’s the best part – when it’s tax-free inside an ISA, you keep every single penny. No income tax, no capital gains tax. It’s all yours!
Part 2: How Much To Invest To Make £2,000 Monthly Passive Income
Here’s the strategy.
- Step 1: First you need to choose a sensible dividend yield
i.e. what return your portfolio needs to generate in order to create £2,000 per month passive income.
Then we need to work backwards to arrive at a number.
A sensible dividend yield to assume is 3.5%, although you can get much higher.
- Step 2: Gradually build your portfolio with growth-focused stocks and funds.
To figure out how much you need to build your portfolio up to, take the monthly amount you want to earn e.g. £2,000 per month, then annualise it by multiplying by 12
i.e. £2,000 x 12 = £24,000.
Then, take that number and divide it by the 3.5% mentioned earlier i.e. £24,000/0.035 which gives you £685,000.
Why £685,000?
That's because, at a 3.5% yield, this portfolio would generate £24,000 annually, or £2,000/month tax-free.
Now, I know what you’re thinking…
‘Guys, £685,000?! That’s a huge number!’
But here’s the secret and this is where step 3 comes in:
- Step 3: Start small and stay consistent.
If you invest £500/month in say, the S&P 500 for simplicity, and earn an average return of 8% annually (after fees), you could reach £685,000 in about 30 years.
See below for an illustration.
Of course, if you invest more money each month, you’ll reach that goal a lot quicker than 30 years.
Recommended: Read week 7 of Financial Joy to master all aspects of investing.
Our approach is to focus on investing in growth-focused index fund or ETF to max out returns.
Then, when you’ve reached that portfolio goal, you could switch to funds or stocks (e.g. UK dividend aristocrats) that mainly pay a dividend if dividend passive income is the priority.
Alternatively, stay invested in high-growth index funds and ETFs and the 3.5% becomes an annual Safe Withdrawal Rate from your portfolio.
There is the big topic of inflation to factor in.
But before talking about that, if you are finding this post helpful, please take a moment to share it with someone who will find it useful.
Part 3: Inflation and the ISA Strategy
First, let’s talk about inflation. The silent wealth killer.
Historically, inflation averages around 2-3% annually.
If we assume an average of 3%, it means prices double roughly every 24 years (using the rule of 72), it’s 72 divided by 3, which gives us 24 years.
Although to be frank, true inflation is higher than 3% as we're sure you know, but let's stick with 3% for now.
So if you want £2,000/month in passive income from dividends in today’s terms, the question is, when do you want it?
Obviously now would be amazing, but that would be unrealistic for most people as you’d first need to build up an investment portfolio.
To begin, we’ll assume 3 times periods of 10 years from now, 20 years from now and 30 years from now.
The problem as highlighted is that the purchasing power of £2,000 today won’t be the same in the future…
so we’ll need to work backwards to see how much we need to earn in dividend passive income in 10, 20 and 30 years from now, in order to maintain the same purchasing power as we have today.
Here is the example with £2,000 today and what the future value of that amount is.
£2,000 x (1 + 0.03)^10 = £2,687.83
This is what’s called a Future Value calculation.
It is saying that to maintain the purchasing value of £2,000 a month (today) in 10 years, your investments need to make you £2,687.83 per month in income.
This amount in 1 year is £32,253.99
Then, we divide that annual number by the assumed dividend yield of 3.5% (or 0.035):
£32,253,99 divided by 0.035 = £921,542.66.
Below is a summary table that repeats this process for 20 years and 30 years from now:
Below is a graph of what £2,000 today will be equivalent to in 10, 20, and 30 years from today.
These are large investment portfolio numbers but remember, you have potentially 10, 20 and 30 years ahead of you for that portfolio to be built up!
In addition, if we adjust our contributions to increase with inflation, it makes a huge difference in terms of achieving those numbers!
This is where it gets exciting and we can gamify this process.
To begin, we need to make an assumption about how much you might have in your ISA pot now.
We took a look at the average market value of ISAs in the UK.
Keep an eye on the line charting up and then down.
The average across all ages is just over £30,000.
Let’s assume that you start with a lower amount of a £20,000 ISA pot (which by itself is a lot for many people).
Here is what you need to be investing today to achieve the passive income goals.
- Scenario 1: Receiving Passive Income In 30 Years
First, Let’s start with if you want £2,000 per month dividend passive income 30 years from now.
We previously worked out that this is equivalent to earning £4,854.52 per month and as a result, you’d need a portfolio of £1,664,408.
Using Compound Interest Calculator, we worked out that if you invest £850 a month in an index fund (e.g. S&P 500) generating an average interest rate of 8% per year (after fees), you’d generate a future portfolio value of £1,682,484, which exceeds the amount required of £1,664,408.
Notice that in these scenarios, we are assuming that your annual deposit is also increasing by the inflation rate of 3%.
- Scenario 2: Receiving Passive Income In 20 Years
Let’s start looking at the the same for 20 years from now.
With the 20-year scenario, £2,000 a month in passive income today is equivalent to needing to earn £3,612.22 in order to maintain the same purchasing power.
We previously worked out that as a result, you’d need to aim for an investment portfolio of £1,238,476.
Again, using a compound interest calculator, we worked out that you’d need to start investing £1,600 per month today and increasing that by 3% annually to reach £1,263,341.59 in 20 years, which exceeds what you’d need to create the passive income you need.
- Scenario 3: Receiving Passive Income In 10 Years
The final scenario is 10 years from now.
To make the equivalent of £2,000 per month in passive income today in 10 years, you’d need to receive £2,687.83 in passive income due to inflation.
However, given that 10 years is much closer than 20 or 30 years, you’d need it invest a lot more money now to arrive at the portfolio you need of £921,542.66.
This is by far the hardest of the scenarios and will be unachievable by most people, although more likely to be achievable by a couple who are high earners and who invest aggressively.
The compound interest calculator shows that you’d need to invest around £4,300 a month and rising by 3% inflation annual to arrive at a portfolio of £926,265.48, which exceeds the target amount we mentioned earlier.
But note that this scenario cannot fully be achieved in an ISA even for a couple as the current allowance is £20,000 a year or £40,000 a year for a couple.
You'd get close if you combined a Stocks and Shares ISA with a Lifetime ISA, making it possible to invest £42,000 a year (£3,500/month) for a couple.
See other account options below.
Phew! 😅
That is a lot to process, but this perspective of factoring inflation into your future plans hopefully has given you a lot of insight.
£2,000 a month is a fantastic first milestone to aim for.
We’d say, start there, and adjust your contributions as your income grows.
Part 4: Other Options For Investing Your Money
Option 1: You could invest the money via a Self Invested Personal Pension (SIPP), to get tax relief and give the amount you invest a boost.
- Basic Rate Tax Payer: For every £80 you put in, you get a £20 rebate from the government as tax relief.
- Higher Rate Tax Payer: For every £80 you put in, you get a £40 rebate from the government as tax relief. £20 of that from doing a self-assessment.
- Additional Rate Tax Payer: For every £80 you put in, you get a £45 rebate from the government as tax relief. £25 of that from doing a self-assessment.
Here is an Example with £500 a month invested and what that could look like with tax relief added.
These higher amounts can then be invested to achieve your investment goals a lot quicker 😀.
However, note that with a SIPP, you have to factor in future taxes.
As things stand, only 25% of your pension is tax-free, the remaining 75% will be taxable depending on what future tax band you are on.
In addition, you won’t have access to this money until the age of 57 (from 2028) and future tax rules could also change (including the age of accessing your pension), making access to your pension potentially harder.
But don’t let this scare you.
We personally give the ISA priority for this ease of access and tax-free status, but we also invest in our pension for the tax benefits, too.
Option 2: You can also invest money via a General Investing Account (GIA), however, this has no tax benefits as gains become taxable when you sell and dividends become taxable, too, above any tax-free amounts.
You’d only really consider this account when you’ve exceeded your Annual ISA allowance, currently £20,000 a year per person.
Below is a detailed comparison table between a Stocks and Shares ISA, General Investing Account and a SIPP.
Note that details are expected to change in the future.
Part 5: Two Bonus Ways to Earn £2,000/Month
While the ISA strategy is great for some, it’s not the only way to create £2,000 in monthly passive income, especially if you don’t have time on your side.
Here are three more ideas to diversify your income streams:
1. Property Investing (After Tax):
Rental income from property investing can be a great way to generate passive income but it is a business by itself and requires a lot of work and capital investment, therefore is NOT passive and is not for everyone.
However, if you can find the right deal with the right strategy, it can help you build up capital to then invest in the stock market.
You can either explore UK or international property opportunities.
Strategies include Flipping, Commercial Property, HMO, AinBnB, Rent To Rent, etc. Learn to implement these strategies via week 9 of Financial Joy where we have real life case studies.
Property investing is harder in the UK due to regulation and tax changes such as extra stamp duty on second homes.
2. Real Estate Investment Trusts – REITs (Tax-Free with ISA):
You can use your ISA to invest in Real Estate Investment Trusts (REITs).
These often provide 4-6% annual returns and are less hands-on than traditional property investing, however, keep an eye on fees.
We’ve made a detailed video about it that we’ll link to below:
Part 6: What Else Can You Invest In?
Here are some additional ideas to explore.
1. Start an Online Business With AI
There are also other things you can do, for example, creating various types of online businesses.
With the accessibility we all have to AI, it has never been easier to start and grow an online business even if you don’t want to show your face.
Examples include: Anonymous AI-Created Niche Blogs, Faceless YouTube channels, AI-Curated Newsletter or Paid Subscriptions, etc
The difficulty is knowing where to start and getting ongoing guidance from people who’ve done it, and staying accountable 😀.
If you’d like our help whilst learning from us, our classes and getting kept accountable by us, join our membership community.
2. Invest In Alternative Asset Like Bitcoin
This one comes with a huge risk warning – You can lose all your money, but you can also gain a lot.
Your capital is at risk always.
My suggestion here is to consider investing up to 1% of your investable assets after doing your research.
Risk management is important, especially with all the crypto memes coins out there.
Please don’t treat this as financial advice. Do what works for you.
If you make money from something like this, that can be reinvested after capital gains tax into an income-producing asset for passive income.
Conclusion
Chances are you feel behind and your investment portfolio is nowhere near what you'd like it to be.
We fully understand especially as we've seen our parents start later in life from scratch (in their mid 40s), which had knock on effects on us too as immigrants.
The key with any of these strategies is to start as early as you can (i.e. today), take some measured risks and reinvest your earnings early on to grow your income faster.
Don't let the negativity of your current situation hold you back or make you think it's too late for you. It's not!
Whether it’s through ISAs via the stock market, property, or other strategies, creating £2,000 in passive income is achievable with the right plan—and now you know how to account for inflation too.
Building wealth through investing is like planting a tree.
Each monthly contribution is a seed.
At first, it may not seem like much, but with patience, time, and consistency, those small seeds grow into a strong, flourishing tree that provides shade and fruit for a lifetime.
So, keep planting those seeds, one month at a time.
More resources about making monthly passive income:
- Join Financial Joy Academy
- If You Have £5,000 in the Bank, DO THESE 5 Things
- 85 Easy Ways To Make Extra Money
Is investing for passive income in the future something you're working towards? Which of the strategies above will you prioritise? Comment ⬇️ and share your thoughts or ask questions.
Thanks for reading, and as always—In all things, be thankful and seek joy
Watch this next for more about monthly passive income:
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