£20,000 in savings? Here’s how I’d aim to turn that into a £7,614 monthly second income!

Putting money into high-quality FTSE 100 and FTSE 250 shares can help investors unlock a life-changing second income over time.

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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.

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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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Charlie Munger famously said: “The first rule of compounding: Never interrupt it unnecessarily.” This tenet applies whether an investor has already built up a large second income or is still working towards one.

Therefore, it’s always a good idea to have some savings set aside for a rainy day. Back in the day, a rainy day would have made it difficult to work outdoors and earn income (hence the phrase).

Nowadays, it could be anything from a broken boiler to a poorly pet. The last thing an investor wants to do is sell stocks (potentially at a loss) to cover an unforeseen bill. So Cash ISAs definitely have a role to play.

But assuming this base is covered, I’d want the rest of my savings in a Stocks and Shares ISA over the long run. Here’s why.

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.

Stairs and elevators

Put simply, stocks deliver better long-term returns than other asset classes, particularly cash.

This doesn’t mean they’re always a sure bet, mind. Reduced dividends, bear markets and crashes, and a myriad of other events (wars, pandemics, financial panics, etc.) do happen. Often unexpectedly.

That’s why the stock market tends to deliver superior returns over time. Investors want a higher potential rate of return for taking on all this extra risk. Otherwise, why bother putting oneself through the wringer?!

Also, as a general rule, stock markets take the stairs up and the elevator down. In other words, they rise steadily but can drop dramatically.

That’s why it’s important to take a long-term, Foolish approach to investing.

Of course, tuning out all the noise when things are going south isn’t easy. But it is possible to cultivate a patient mindset with enough experience.

Life-changing passive income

Long term, the blue-chip FTSE 100 has returned almost 8% a year on average, while the mid-cap FTSE 250 has delivered around 10.5%. Both figures are with dividends reinvested rather than spent.

If this record continues, a £20k lump sum equally invested across these indexes would turn into an eye-catching £304,406 over the next 30 years (excluding any ISA platform fees).

However, if I decided to invest a further £650 a month – the equivalent of £150 a week – along the way, my total would be transformed into a mighty £1,522,806. So, just over £1.5m!

From this, I could decide to take £91,368 a year in passive income from a 6%-yielding dividend portfolio. That’s the equivalent of a tax-free £7,614 monthly second income.

A world-class company

To achieve this, I’d build a portfolio with quality stocks like AstraZeneca (LSE: AZN).

There are a number of things I like here. For starters, the pharma giant has 12 blockbuster drugs (those generating $1bn in annual sales) as well as a gigantic pipeline of future potential wonder treatments.

Naturally, some won’t come to fruition, meaning clinical trial failures are an unavoidable risk. But I find Astra’s deep pipeline reassuring.

Second, the company remains extremely ambitious. It recently said it’s aiming to grow revenue by about 75% to $80bn by 2030.

This will be through the potential launch of 20 new medicines as well as growth in its existing oncology, biopharmaceuticals, and rare disease portfolio.

Given this possibility and the firm’s excellent recent record of execution, I find the stock’s forward price-to-earnings multiple of 18.7 attractive.

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 AstraZeneca Plc. The Motley Fool UK has recommended AstraZeneca Plc. 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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