How I’d aim to transform an empty ISA into a £7,000 second income!

Many of us invest for a second income. Here, Dr James Fox explains why regular savings and discipline are the key to our passive income goals.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Many Britons find the idea of generating a second income daunting, especially with the demands of daily life. However, it’s important to emphasise that achieving this goal is entirely feasible with a disciplined approach and a commitment to regular savings.

By setting aside a portion of our earnings and investing wisely, individuals can gradually build a second income stream over time, offering financial stability and growth opportunities for the future.

It shouldn’t be daunting

Starting to invest shouldn’t be daunting, even if I don’t have a substantial amount of capital to begin with. The key is to establish a disciplined approach that includes regular savings.

By consistently setting aside a portion of my income and directing it towards investments, I can gradually build a portfolio over time. This approach focuses on long-term financial discipline and the power of compounding, allowing me to grow my investments steadily.

It’s not about how much I start with. It’s about the consistency and commitment to saving and investing over the long run that can ultimately lead to financial growth and security.

The chart below highlights the impact of saving £200 a month, excluding the positive impact of interest. After 20 years of putting aside £200 a month, I’d have £48,000.

Created a thecalculatorsite.com

Sensible investing

To build a portfolio over time, I must understand the importance of consistency and the potential of compound returns.

Regularly saving and investing, even small amounts, can add up significantly over the years. However, it’s not just about blindly pouring money into the market. It’s essential to research and understand the investments I’m making.

Thankfully, there are also resources out there, like The Motley Fool, that can help me make informed decisions. These resources, which are known for simplifying complex financial concepts, can be incredibly useful.

The secret sauce

Compounding is the secret ingredient for growing my portfolio over time. When I reinvest the returns I earn from my investments, those returns start to earn returns of their own. It’s like a snowball effect that can significantly boost my wealth.

For example, if I invest £200 a month and achieve an average annual return of 7%, I’ll have nearly £100,000 in 20 years. That’s the power of compounding. The longer I stay invested and let my money work for me, the more impressive the results will be.

So I’m not just saving and investing for today, but for my future self. With patience and discipline, I can harness the incredible growth potential of compounding and watch my portfolio steadily expand over the years. It’s a strategy that aligns perfectly with my long-term financial goals.

Created at thecalculatorsite.com

The second income

The above figure, £100,000, is just an example, and there are so many variables. These include time, rate of annual return, and the size of my contributions. Using the above assumption of 7% yield, my portfolio could generate around £7,000 a year as a second income.

However, it’s essential to remember that stock market returns can fluctuate, and there are no guarantees. The actual income may vary depending on the performance of the investments within my portfolio.

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.

More on Investing Articles

White female supervisor working at an oil rig
Investing Articles

Could the UK general election be bad news for this FTSE 250 energy producer?

The country is due to vote in the general election on 4 July. Our writer looks at the possible implications…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Should we buy cheap FTSE 100 shares now, before it’s too late?

The FTSE 100 is up 5% so far in 2024 and hit an all-time high in May. That means the…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

Here’s why I think the Lloyds share price could hit a 5-year high in 2024

It's up 13.5% so far in 2024, and reaching new highs. But where might the Lloyds Bank share price go…

Read more »

Middle-aged white man pulling an aggrieved face while looking at a screen
Investing Articles

If I’d put £15k into this FTSE 250 stock in 2008, I’d have over £1.26m today

This multi-billion-pound business has created plenty of millionaires over the last 16 years, but can it repeat this performance?

Read more »

Playful senior couple in aprons dancing and smiling while preparing healthy dinner at home
Investing Articles

3 dividend shares I’ve bought for the next decade!

I think these UK dividend shares can amplify my long-term passive income, and could even be on track to becoming…

Read more »

Investing Articles

If I’d put £5,000 in Scottish Mortgage shares at the start of 2024, here’s what I’d have now

Scottish Mortgage shares have staged a recovery lately, powered by the public and private growth stocks held in the portfolio.

Read more »

Happy couple showing relief at news
Investing Articles

9.9% dividend yield! Is this FTSE 100 stock a brilliant bargain?

This leading British enterprise looks like a delicious deal for passive income, trading at a low multiple while offering a…

Read more »

Investing Articles

If I’d put £5k in a FTSE 100 tracker fund 5 years ago, here’s what I’d have now

Investing in a FTSE 100 index fund is a terrific way to start building wealth passively with minimum effort. But…

Read more »