£20k second income? Here’s my £5 a day strategy to get there

£5 doesn’t go as far as it used to, yet with the right investment strategy I think it could build towards a yearly £20k second income.

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Could I invest £5 a day to build a £20k second income?

It wouldn’t be easy, of course. A few pounds a day to build such a big income sounds like a stretch, especially an income I’d hope to withdraw indefinitely. But I do have a trick up my sleeve, one that can continuously multiply every pound I save into much more than the starting stake.

More and more people are using this wealth-building strategy to secure financial flexibility and build second income streams. Using it, I think a £20k income could just be within reach. Let’s look at how.

£5 a day saving

We’ll start with the £5 a day saving. It sounds small, and it certainly doesn’t go as far as it used to, but a fiver feels like an amount I could dig out of my spending by cutting back a little. 

If I could do that regularly, I’d be saving around £150 a month. On a yearly basis, around £1,800. So those little sums add up, but, alas, we’re still some way off a £20k yearly income. Let’s work that out then.

A rule of thumb for withdrawing a second income is to take out 4% a year. The thinking is this is on the lower end of stock market returns, so I invest my money and withdraw less than it’s earning. If the investments go well, I’d expect to be able to withdraw that in perpetuity.

This isn’t a guarantee, of course. I’m relying on companies and the economy to perform for my money to grow. While that’s happened handsomely in the past, no one knows what the future will bring. This is one of the risks I must bear in mind.

But let’s say I think the stock market will continue to perform like the last few decades or so. Well, then I’d expect to be able to withdraw 4% year after year, perhaps without even eating into the nest egg I’ve built up.

The difficult part

Now, I still haven’t got to the difficult part here. To withdraw £20k at 4% I would need an investment of £500k. In other words, I’m trying to turn £5 a day into a nest egg of half a million pounds. Seems impossible when put like that. But I haven’t crunched the numbers yet, and I do know that smart investments and compound interest often lead to surprising results. 

I’ll be assuming a 10% average return that compounds with my £5 a day. With these numbers, this is how long it will take to reach my goal:

£5 a day
0%10%
1 year£1,800£1,980
5 years£9,000£12,088
10 years£18,000£31,556
20 years£36,000£113,405
30 years£54,000£325,698
35 years£63,000£536,628

So there we go. In the end, I make it to my goal after just about 35 years. If I was prudent enough to begin this process at 20 years old, I’d have my second income secured by 55. That doesn’t sound too bad at all.

To the letter

The reality, though, is that everyone’s journey is different and can change a lot on the way. I wouldn’t expect to follow a plan like this to the letter. That said, it can serve as inspiration, to show what’s possible. That’s how I’ll be viewing it today.

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.

John Fieldsend 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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