The stock market can be a tricky thing to understand. If someone had told me at 18 that I could get a second income by investing £3 a day, I probably wouldn’t have believed it. Now, I can see it’s surprisingly simple. Here’s how I’d do it, starting from scratch.
Why £3 a day?
Let’s begin with the saving. To start building wealth, I need some cash to buy shares. I think £3 a day is a good amount to show the power of investing.
That amount works out to around £90 a month. While not everyone can save this much, it’s the same as a daily coffee or meal deal. Not a completely crazy amount to find in the budget of someone who’s earning.
Best of all, the strategies work for any amount I can save. If I saved less, I could still build up wealth. And if I saved more, I could get to a second income even quicker.
Why UK shares?
The next step is to invest. I’d look to put that £3 a day into UK shares. All I need to do is open an account – Stocks and Shares ISA gains are tax-free up to £20k a year – and choose a few companies to buy into.
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With shares, I’m literally owning a part of the company. This means I sometimes get a share of its earnings, or my shares are worth more as it grows.
UK shares have a good track record of rewarding shareholders. The big FTSE 100 or FTSE 250 firms have returned around 8%-10% annually over the last few decades. This is far more than I can get in a savings account, although savings account returns are guaranteed, which share returns aren’t.
Which UK shares I invest in is crucial. While companies tend to perform well, there’s always a Blockbuster or Thomas Cook that turns out to be a disaster. A good strategy to limit risk is to diversify into 10 or more firms.
A £14,829 yearly second income?
So how does this all work in practice then? Well, let’s assume I’m getting a 9% return on the £3 a day I’m putting into UK shares.
The first year, I’d save £1,100 and hopefully get back £99 from my 9%. This is nothing too crazy. But the beauty of investing is how the compound interest builds up over time. It works exponentially.
After 30 years, I’d have built up a £164,767 net worth. At a 9% return, the yearly second income I’d receive would be £14,829, a pretty impressive amount after starting with just £3 a day!
A word on the risks though. First, I’ve used a 9% average, but actually, this would swing wildly from year to year. It takes a strong stomach to deal with rough years like 2008 or 2020 without panicking and selling.
Second, past performance isn’t a guarantee of future returns. The above calculation works only if the stock market grows similarly to how it has in the past. Finally, inflation would make the above amounts less in real terms.
Still, I don’t think there’s a better way to build wealth than investing in companies. I already do something like the above with the aim of having a second income of my own one day.
