£10,000 in savings? Here’s how I’d aim to turn that into a £42,495 annual second income

This Fool explains how he’d go about investing £10,000 in a Stocks and Shares ISA to target a handsome second income.

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Having 10 grand in savings is no easy feat. However, If I did have it, instead of letting it sit idly in my bank account, I’d put it to work to earn me a second income.

Here’s how I’d do it.

Efficiency is key

My first step would be to put this money in a Stocks and Shares ISA. By doing that, I’d be able to benefit from the numerous growth opportunities as well as the tax benefits it provides. This would enhance the likelihood of me boosting my wealth faster over the years to come.

Of course, as I do, I’d keep some cash tucked away for a rainy day. You never know when an unexpected cost or emergency may crop up. Nevertheless, I put the bulk of my savings to work in my ISA.

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.

Quality is key

Just as squeezing the most out of my money is key, so is selecting the right stocks to buy. That’s where insurer and asset manager Legal & General (LSE: LGEN) comes into the frame.

With its share price at 255.1p, the stock has a dividend yield of 8%. That’s well above the FTSE 100 average of 3.9% and the sixth-highest on the index.

Dividends are never guaranteed, so I need to make sure that any company I invest in has a sustainable payout. With Legal & General, I feel it does.

That’s because the business has paid a lot of attention to maximising shareholder returns. By the end of this year, it would have paid up to £5.9bn to investors as part of its five-year cumulative dividend plan.

Actions like these lead analysts to believe that its yield will rise in the future. It’s predicted the business will hike its payout by 5% this year and the same again in 2025. Based on that, the forward yield is a whopping 8.9%.

While the dividend is tipped to rise, I also believe its share price has the potential to do so as well. Its shares look cheap, trading on just nine times forward earnings.

The stock has been heavily impacted by rising interest rates. They negatively affect asset valuations. High inflation has also seen deposit volatility.

However, rates are expected to fall as soon as May, which should boost the stock. I’m also bullish on the long-term prospects of Legal & General as it capitalises on trends such as the UK’s ageing population. It’s already the leader in areas such as the Pension Risk Transfers market.

Let’s talk money

The aim is to grow my wealth with an average annual return of 8%, in line with the Legal & General dividend today.

My £10k compounded over 30 years at that return would become £109,357. By year 30, I’d be making £8,381 in interest. That’s not bad at all.

However, what I’d do to boost my income further is add monthly contributions. For example, if I invested another £300 a month, that would take my investment pot to £556,465. By year 30, I’d be earning £42,495 in interest.

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.

Charlie Keough has positions in Legal & General Group Plc. 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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