When I think about being more proactive with my finances, one of the most attractive options is to build a second income. I have a couple of sources of passive income already, and receiving regular cash payments really makes me feel like my money is working for me.
Now that interest rates are as high as they have been since 2008, is this a rare chance to build a second income for life?
The reason it might be is that higher rates mean I can earn more in savings accounts like a Cash ISA. I recently opened an account that lets me collect nearly the full 5% on any cash I have in the account. That’s a decent amount, and I like getting an app notification each month telling me I’ve made some money without having to do anything.
But if I’m aiming for a lifelong second income, there’s a snag. While that 5% sounds like a good chunk of change, turning £1,000 into £1,050 over a year, I’m still losing money to inflation as everything’s getting more expensive.
In fact, estimates predict the average household’s Cash ISA will lose £1,087 in real terms this year. That’s enough for me to steer clear of using it for a second income.
Is there a better way? Well, I’d say perhaps the best strategy right now is to invest in income shares via a Stocks and Shares ISA. This is where I buy shares in a company that pays me a slice of the profits they make.
Cheap incomes shares
A lot of UK companies offer attractive income at the moment. In fact, the average FTSE 100 payout is now over double that of the US S&P 500. A rocky year in the markets has made a lot of these income shares look pretty cheap.
What kind of second income could I get? Well, I can aim for a 10% total return. This is higher than inflation right now, although wouldn’t be a steady amount every single year (and could even fall). But averaged over a longer period, this is the kind of payout that allows ordinary people to retire early purely due to investing.
For example, a £20,000 stake topped up with £200 a month at 10% for 30 years turns into a nest egg of £555,272. It doesn’t seem like it could grow that much, but the trick is that I’m getting interest on the interest, so it grows exponentially.
£22,000 a year
And once I’m done, I could withdraw 4% a year, which would return a second income of around £22,000. All I’d have to do is hold the shares, and barring big trouble in the markets I’d expect to keep my half a million sum intact. I’d feel very financially secure if I could build towards that kind of wealth.
An obvious question has to be: isn’t investing in shares risky? Well, yes it can be. Some stocks go down, which is why I like to keep a diversified portfolio of at least 10 to 15 well-researched companies to lower my risk.
And overall, with inflation at such high levels, I see investing in income shares as a far better path to a second income than a Cash ISA.
