Saving £200 a month? Here’s how I’d aim for a second income worth £36,469

Many of us can only dream of a second income. But it’s easier than most of us realise when we invest sensibly in stocks and shares. 

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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.

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Investing in stocks and shares allows us to earn a second income by leveraging their growth and payments to shareholders in the form of dividends. While many people in the UK may prefer other routes, like Investing in buy-to-let properties, I believe stocks and shares offer the best returns and the most flexibility.  

So, how can I turn a £200 monthly contribution into a much larger second income? Let’s find out. 

Compounding is key

£200 a month, or £2,400 a year might not sound like a lot of money to put aside, but it adds up over time. In fact, £200 a month is how much I put into my daughter’s Stocks and Shares ISA each month, and it’s adding up nicely. After five months, we’ve experienced 30% growth in addition to the monthly contributions. 

Of course, it’s unlikely that this pace of growth is sustainable across the next 18 years, but growth compounds. So, even if my current growth moderates to around 10% per annum — I’m still aiming for a lot more — she’d have £121,113 when she ‘becomes an adult’. 

I say this for illustrative purposes as there are many variations as to how we could get to our desired endpoint. If I continued with £200 a month, achieving 10% growth annually, I’d have enough capital to generate £36,469 annually. 

However, this requires me to grow me portfolio sensibly over three decades. It’s entirely achievable, because growth compounds. But I need to recognise that poor investment decisions can lose me money.

Growing my portfolio

There are several exceptions, but I tend to look to the US for my growth-oriented investments. Nvidia, Super Micro, Powell Industries, CRISPR Therapeutics are among the investments I’ve made over the past year that have yielded more than 50%. 

AppLovin (NASDAQ:APP) is another investment which was been good to me. But I still like it a lot and I’m considering investing more. 

AppLovin is a software company specialising in maximising advertising revenue for its clients. It operates within a thriving industry and a great track record of beating market expectations — that’s a great sign.

One area of concern is that its still quite indebted and growth has been unstable historically. However, over the past year, it’s been thriving in tough conditions.

In the fourth quarter, AppLovin reported a earnings per share of $0.49, surpassing expectations by $0.14. Furthermore, revenue for the quarter amounted to $953.26m, marking a significant year-over-year increase of 35.7% and surpassing estimates by $25.23 million.

Nonetheless, the most compelling aspect of AppLovin lies in its projected growth over the medium term, spanning the next three to five years. Although the stock’s forward price-to-earnings ratio stands at a relatively high 31 times, its price-to-earnings-to-growth ratio is an attractive 0.62. This suggests that AppLovin’s growth potential may be undervalued. In fact, on a forward basis, the stock is trading at a modest 13.7 times earnings.

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 positions in AppLovin Corporation, CRISPR Therapeutics, Nvidia, Powell Industries Inc, and Super Micro Computer. The Motley Fool UK has recommended CRISPR Therapeutics and Nvidia. 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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