We’d all love a second income. Getting one can be the challenging part. Many of us will take second jobs or invest in the house market for a buy-to-let income.
However, from personal experience, investing in stocks and shares is a more efficient use of my time, and offers significantly better yields if I invest well.
How to invest with nothing
Well, I can’t invest with £0. I will need something. But in the absence of a lump sum to use as starting capital, I can look to save money from my salary and put that towards my investment journey.
Ideally, I’ll want to do this on a regular basis, ideally monthly. Moreover, I may prefer to use automatic savings as this should prevent me from delaying or missing a payment.
Obviously, the amount of money I invest will depend on my personal circumstances. Someone earning £1,500 a month after tax may only be able to afford £150 a month, someone on £5,000 a month after tax may be able to contribute over £1,000.
And finally, I’ll want to do this all within a Stocks and Shares ISA. The account provides investors with the opportunity to earn dividends without paying tax — that’s a huge bonus.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
How it works
Indeed, consistent contributions to an investment account allow our money to gradually accumulate over time. However, the real magic of investing in stocks lies in the concept of compound returns.
Compound returns come into play when we reinvest our earnings every year to fuel the growth of our portfolio. The beauty of this process is that our portfolio starts earning interest not only on the initial investment but also on the previously earned interest.
This compounding effect leads to exponential growth, where our wealth can significantly multiply over the long term. Embracing the power of compound returns can be a game-changer in building a prosperous financial future.
Time, returns, and contributions
The three main variables are time, returns, and contributions. Here’s how they impact our investments in a compound returns strategy.
- Time. The longer I stay invested, the more time my money has to benefit from the power of compounding. Over time, my investment can generate returns not only on the initial principal but also on the accumulated earnings.
- Returns. The rate of return is a key determinant of how much my investment will grow over time. Higher returns contribute to faster and more significant growth. If I invest poorly, I could lose money. If I invest wisely, I could be looking at annualised returns between 6-12%.
- Contributions. By consistently adding new funds to your portfolio, I increase the base amount that can generate returns and compound over time.
I can’t ignore the risks, of course. Returns aren’t guaranteed in investing and I could lose money as well as make it. But here’s what my second income could look like by investing a £500 a month — and this could be shared with a partner or spouse.
| 6% | 8% | 10% | 12% | |
| 5 years | £1,836.10 | £2,563.47 | £3,357.29 | £4,223.53 |
| 10 years | £4,569.72 | £6,758.25 | £9,395.63 | £12,573.06 |
| 20 years | £13,230.52 | £22,318.72 | £35,676.62 | £55,298.27 |
| 30 years | £28,987.95 | £56,857.38 | £106,820.33 | £196,308.00 |
