No savings at 40? Here’s how I’d target a second income worth £5k a year!

It may sound unlikely, but it’s really possible to generate a second income even when starting with nothing. Dr James Fox explains.

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Investing in stocks can be an efficient and financially rewarding way to generate a second income, as opposed to options like buy-to-let or additional employment. It’s certainly more time efficient, and if we get it right, it can be substantially more financially rewarding.

No savings

I can start a portfolio with little to no initial funds by emphasising regular, disciplined, and automatic saving. By consistently setting aside a portion of my income and investing it wisely, I can gradually build my portfolio over time, allowing my investments to grow and work for me. This approach focuses on long-term financial discipline and the power of compounding, which can help me achieve my investment goals even when starting from scratch.

Pound-cost-averaging

By contributing to my portfolio on a monthly basis, I can also benefit from ‘pound-cost-averaging’. This investment strategy involves regularly investing a fixed amount of money at predetermined intervals. It helps me navigate the often unpredictable ups and downs of the stock market.

One of the key advantages of this approach is risk mitigation. By investing a fixed amount consistently, I buy more shares when prices are low and fewer shares when prices are high. This means that I’m not making significant investments all at once, reducing the risk of catching the market at its peak.

Letting it grow

Growing my portfolio through compounding is a fundamental strategy that aligns perfectly with Warren Buffett’s famous quote: “The most powerful force in the universe is compound interest.” This approach underscores the incredible potential for exponential growth over time, making it an essential aspect of my investment journey.

Firstly, I need to understand the significance of reinvesting my investment gains back into the portfolio. Rather than withdrawing dividends, interest, or capital gains, I reinvest them to purchase additional assets or shares. This reinvestment cycle not only accelerates the compounding process but also capitalises on the concept of generating returns on previous returns.

Time is a powerful ally in the realm of compounding, and I should fully grasp its importance. The longer my investments have to grow and reinvest, the more pronounced the compounding effect becomes. Even if my returns are modest, the cumulative impact over an extended period can result in substantial wealth accumulation.

My second income

So, if I were to set aside £250 a month for my investments, while achieving 8% annualised returns, it would take me just 12 years before my portfolio would be generating £5k of total returns a year — this could be taken as passive income. So, by 52, I could be using that passive income to fund holidays or whatever else I may wish to do.

Of course, there’s no guarantee I can achieve an 8% return. If I invest poorly I could lose money. This is why it’s so important that I do my research and use resources like The Motley Fool that have been instrumental in democratising investments.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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