Earning a second income passively is understandably a dream for many people. After all, who wants to be toiling away at work for extra hours as we age? Or worse, starting a second job? Not me!
However, similar to how we only have so much time and energy, most of us only have so much spare cash too. Therefore, investors like myself have to play the long game and regularly invest savings.
If I were starting my investing journey today, I would open a Stocks and Shares ISA, so as to pay no tax on my returns. Then I’d invest £500 a month in shares to work towards a sizeable annual second income.
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. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Reasonable wealth
To start, let’s look at how this amount would build up over 25 years, without generating any returns at all.
| Time | Savings |
|---|---|
| 1 year | £6,000 |
| 5 years | £30,000 |
| 10 years | £60,000 |
| 20 years | £120,000 |
| 25 years | £150,000 |
This shows how a simple saving strategy can build reasonable wealth over the long term. However, this outcome can be improved dramatically through investing in shares.
Supercharged wealth
The UK’s blue-chip FTSE 100 index has historically returned about 8% each year. In the US, the S&P 500 index has returned closer to 10%. Both figures are with dividends reinvested.
My own portfolio has a balance of US and UK stocks. But for our purposes, I’m going to go with a more conservative 8% average return.
Here’s what now happens to my regular £500 investments over time:
| Time | Savings (8%) |
|---|---|
| 1 year | £6,220 |
| 5 years | £36,490 |
| 10 years | £90,106 |
| 20 years | £284,639 |
| 25 years | £415,276 |
We can sure see the difference here. The final figure is over three times higher!
Naturally, it won’t all be smooth sailing. Reality will throw in a few curveballs — like the 2008 financial crash or a pandemic. Historically though, the stock market tends to rise higher.
What shares would I buy?
A growth stock that I think can outperform the market in future is MercadoLibre (NASDAQ: MELI). This is Latin America’s largest e-commerce and fintech platform, active in 18 countries.
Admirably, the firm has fended off outside rivals looking to eat its lunch in its own backyard. These include Singapore’s Shopee (owned by Sea Limited) and Amazon.
In 2023, MercadoLibre’s revenue jumped 37% year on year to $14.5bn, while net profit surged 142% to $1.2bn. Analysts see $3.2bn in profit from $27bn in revenue by 2026!
Now, the region does have a couple of struggling economies, notably Argentina. If things take a turn for the worse for these, that could affect the firm’s overall performance.
That said, e-commerce and digital payments in Mexico and Brazil are rocketing in popularity, offsetting the Argentina slowdown.
MercadoLibre’s management recently said: “We believe that we are uniquely placed to capitalise on the structural shifts that are transforming the region’s commerce and financial services markets.”
In Latin America, the digital economy is booming, and this incredible firm is paving the way.
Targeting that £29k
Once a portfolio of such stocks has helped me reach my £415,276 target, I could start drawing this down.
Alternatively, I could change tack and invest purely in dividend stocks. In this instance, an income portfolio yielding 7% would pay me just over £29,000 a year in passive income.
Of course, individual dividends are never guaranteed and inflation would nibble away at future spending power.
Still, this shows me how £500 a month invested in the right shares could build a very impressive second income.
