£7,000 in savings? Here's how I can aim for around £3,200 a month in passive income

The desire for income is a common goal for many people. That's even more likely these days, given the steep rise in the UK's cost of living.

I found an old shopping bill the other day in my car boot. It was from three years ago and showed I had spent £76. As an experiment, I decided to visit the same store and buy the exact same items. Unfortunately, there were a few items that were not available, so I bought the same. The bill came to almost £120!

Thankfully, inflation finally seems to be coming down now and interest rates are said to have come down. But this time I developed my focus on finding stocks that generate attractive real returns (ie above inflation).

At least there is still ISA

Brits may face high rates, but we're lucky to have a Stocks and Shares ISA. This investment vehicle protects any capital gains and dividend income from taxation.

This means I can invest up to £20,000 a year and not worry about tax. So if I had £7,000 left over to invest today, I would move the money straight into a Stocks and Dividends ISA.

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.

Many options

A fixed income portfolio will have a diverse mix of growth and high yield stocks
dividend payments. The former will likely have lower yields as businesses continue to invest in growth opportunities, while the latter will prioritize dividends to shareholders.

My favorite high yield stocks include the asset manager IM&G (9.5% yield), an Asian-focused banking giant HSBC (7.1%), and insurances Legal & General (9%) and Aviva (7%).

An example of a quality dividend growth stock from my portfolio is Games Workshop (LSE: GAW). The company is yours Warhammer 40,000is a small tabletop wargame with millions of dedicated fans around the world.

I FTSE 250 the stock yields only 2.7%, but the company has a policy of distributing the remainder in the form of special dividends. Couple this with a 168% share price increase over the past five years and investors have a market-shattering investment on their hands.

But why was the stock a smash hit? However, the market often rewards firms with very high returns on capital and fat profits. Games Workshop has both.

Generating income

Naturally, it is not encrypted to store this form forever. Profits can be cut if earnings light up because, say, a new product line disappoints customers. That could lead investors to question the stock's earnings multiple, which currently stands at 26.

That's why I can build a basket of stocks with my £7,000. In doing so, I believe it is reasonable to aim for a 10% return over time with an average yield of 6% and 4% appreciation.

At this rate, a £7k investment would grow to £47,092 over 20 years, paying £2,825 a year in dividends.

However, investing an extra £250 each month from the start would deepen my portfolio to £226,792, with annual dividends of £13,607. I keep reinvesting those payments into fuel mileage refunds.

After 30 years, my ISA will amount to £638,245, producing dividends of £38,294 a year – around £3,200 a month.

Regardless of what inflation looks like at the time, I am sure that this income can greatly improve my standard of living.