Here’s how I used to invest £300 to generate £2,000 of monthly income

UK shares have long been a popular asset class for income seekers. Thanks to products such as Individual Savings Accounts (ISAs) and Self-Invested Pensions (SIPPs), people can increase their income without paying a single penny of tax.

These tax-paying products have large annual allowances. The ISA limit is £20,000, while SIPP holders can invest up to their annual income (up to a maximum of £60,000).

However, investors don’t have to invest anywhere close to this to eventually become financially independent. Here’s how just a few hundred pounds a month can end up generating £2,000+ in income

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.

Collective miracles

A modest regular investment can turn into a huge pot over time due to the power of compounding. By reinvesting the income, my investment not only grows from the original amount but also from accumulated profits. This creates huge growth in the long term.

With this in mind, what can I do if I regularly invest £300 a month? Here is an idea based on different rates of return and investment timeframes.

History shows us that all these rates of return are possible by investing in real estate stocks. But none of this is guaranteed and I can lose money while doing it.

But let’s consider an average figure of 7.5%. This is around the long term average of FTSE 100 shares since the index was created in 1984.

With an investment pot of £404,233.63 after 30 years, I can shift my focus to dividend paying stocks to direct regular income.

Assuming I could get a dividend yield of 6%, I would earn £24,254 a year, which is just over £2,000 a month (£2,021, in that case).

Where can you plant?

Investors have thousands of stocks to choose from in the UK and overseas. This makes building a diversified portfolio that provides stability and respectability over time much easier.

But instead of choosing individual stocks, investors can also choose from a number of investment trusts and exchange-traded funds (ETFs) to achieve the same goal.

These financial vehicles spread their pooled capital across various assets – and in some cases across asset classes – to reduce risk and take advantage of different growth opportunities.

With this in mind, I would want to invest in an FTSE 100 tracker fund to target that 7.5% annual return. Probably another one I would choose is this one iShares Core FTSE 100 UCITS ETF (LSE: CUKX).

There are many similar funds in the market today. But with a total expense ratio of only 0.07%, this is currently the most expensive.

FTSE 100 trackers like these provide exposure to blue-chip companies with market-leading positions, diverse revenue streams and strong balance sheets. And with a wide selection of products including the banking giant Lloydsdrug maker AstraZeneca and the miner Rio TintoI would enjoy the special variety.

Past performance is no guarantee of future returns. And the lack of appetite for UK shares could affect how much I make from the fund for decades to come.

But with investors keen for British stocks to recover, I think this ETF could be an excellent way to target long-term wealth, alongside my portfolio of individually selected stocks.