How I’d invest £500 a month in shares to target a £29,000 second income

Investing in shares is a tried-and-tested way to build a second income. Our writer explains how he’d do it, starting from scratch today.

| More on:
Passive income text with pin graph chart on business table

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.

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.

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:

TimeSavings (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.

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.

Ben McPoland has positions in MercadoLibre. The Motley Fool UK has recommended MercadoLibre. 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

Young black man looking at phone while on the London Overground
Investing Articles

1 delicious penny stock I reckon can deliver juicy returns and growth

This food delivery penny stock has experienced a surge in performance and uptake recently. Our writer is excited by its…

Read more »

Investing Articles

If I’d bought Rolls-Royce shares the day Tufan Erginbilgiç joined here’s what I’d have now

Harvey Jones is startled by just how fast the Rolls-Royce share price has risen since its transformative CEO took over.…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

How much do I need to invest in Lloyds shares to earn income of £1,000 a year?

Harvey Jones is getting income and growth from his Lloyds shares but wished he'd bought more of them. So he's…

Read more »

Illustration of flames over a black background
Investing Articles

Down 75%! Will the Saga share price ever be loved again?

The last few years have been incredibly difficult for those watching the Saga share price. But what does the future…

Read more »

Investing Articles

What kind of return could I expect by investing £100 monthly in a Stocks and Shares ISA?

Using a Stocks and Shares ISA to avoid capital gains tax could grow a £100 monthly investment into a second…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Can strong operational momentum keep the Informa share price rising?

FTSE 100 company Informa has been performing well, but this may be just the beginning of a multi-year trend for…

Read more »

Market Movers

What’s going on with the Britvic share price?

Jon Smith flags up why Britvic's share price is surging on Friday, but believes that the company is in a…

Read more »

Cheerful young businesspeople with laptop working in office
Dividend Shares

2 super-cheap passive income shares I’m eyeing up right now

Jon Smith discusses two of his favourite passive income shares in the banking and property sectors, both featuring yields above…

Read more »