£50k in savings? Here’s how I’d aim for a second income worth £60,000 a year

Many of us invest for a second income and the prospect of an easier life. Dr James Fox explains how his investment strategy brings that prospect closer.

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Typically, we’d look to earn a second income by investing in dividend-paying stocks. And despite the recent surge from the FTSE 100, UK stocks represent an attractive market for dividend-focused investors.

However, if I had £50,000 in savings, I’d struggle to generate a life-changing second income in the near term. Even this relatively large figure could only generate, at most, £4,000 a year. That could certainly help, but it’s unlikely to be life-changing.

So, I say ditch the dividend-focused investing and invest to build a much larger portfolio. Here’s how I’m aiming to build my portfolio.

Contributions and compounding

Contributions and compounding are the cornerstone of my strategy. It’s about regularly injecting additional funds into high-potential investments and letting the power of compounding work its magic.

Consistency is key; small, regular investments can snowball into substantial wealth over time. Even £100 a month can make a huge difference when maintained for a decade or two. As we can see, patience is key.

Just take a look at how my portfolio could compound into something much larger depending on my achieved rate of growth. The below figures assume £50,000 of starting capital and £100 monthly contributions.

10 years£97,878.70£155,836.57£249,532.37
20 years£176,735.38£442,340.57£1,135,498.62
30 years£290,521.56£1,217,918.76£5,069,377.72
CAGR: compound annual growth rate

It’s worth taking a moment to recognise the importance of the growth rate. At 15%, my earnings compound massively and would eventually be worth around 17 times more than if I achieved 5% annual returns.

Is 15% achievable? Absolutely. In fact, funds and trusts like Scottish Mortgage (LSE:SMT) have delivered returns above 15% over the last two decades. Likewise, a host of stock pickers have smashed this figure out of the park.

So, taking the middle number, £1.22m, that would be enough to generate £60,000 annually as a second income assuming a modest 5% dividend. But there are so many variables. Investing poorly will lose me money. Investing intelligently could send me on the path to financial freedom.

Scottish Mortgage

I wouldn’t put all of my money in Scottish Mortgage, but it’s worth highlighting how the Baillie Gifford & Co could help me achieve returns close to 15% annually.

Scottish Mortgage invests in growth stocks and disruptive technologies. And it has an excellent track record. Of course, I could invest in these stocks individually, but with 100+ holdings and a team of analysts, Scottish Mortgage is diversified and in a better position to make those decisions than most investors.

Having said that, I’m not convinced by its large holding in Moderna and some of its investments, including Kering, haven’t performed overly well in recent months. Having said that, it’s about investing for the long run, and Scottish Mortgage has a reputation for finding the next big thing before most people have even heard of it.

If I had invested £50,000 in Scottish Mortgage 20 years ago, today I’d have £755,000. That’s not quite 15% annualised growth. However, it’s clear that Scottish Mortgage is strong performer over the long run.

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 Scottish Mortgage Investment Trust 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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