£15,000 in savings? Here’s what I’d do to turn that into a second income worth £60,000!

Millions of us invest for a second income or a passive income. Dr James Fox explains why he follows a growth-oriented investment strategy.

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Money made with minimal effort is arguably the best way to earn a second income.

Yes, there are plenty of ways to make that happen. We can rent out a parking space or invest in buy-to-let investments.

However, in my opinion, there’s no better way of earning a second income than investing in stocks and shares.

And as billionaire investor Warren Buffett once said: “If you don’t find a way to make money while you sleep, you will work until you die.”

I think this is a threat looming over all of us. We want to make more money, retire early and enjoy our later life. So here’s how I’d make it happen.

Forget dividend stocks for now

Let’s imagine we have £15,000 in savings and we’re going to start an investment journey with that cash.

The first thing we need to do is be realistic. £15,000 a year isn’t enough to help us earn a substantial second income.

Even with the very best dividend stocks, I could only realistically earn £1,200 annually from £15,000 of investments.

So I have to build my portfolio. I don’t need to be investing in dividend stocks or any type of stock, I just need to invest in companies that I think will help my portfolio grow.

Keep the fire burning

Yet £15,000 is a great figure to kick things off. But my portfolio would grow faster if I made additional contributions. Major brokers, such as Hargreaves Lansdown, allow us to contribute as little as £50 a month. It might not sound like much but it adds up over time.

Equally, if I have more disposable income I could invest up to £20,000 annually within a Stocks and Shares ISA. The ISA wrapper protects my investments from tax, which could be hugely beneficial.

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.

It’s like adding fuel to keep my portfolio growing. For context, contributing £200 a month could be the difference between having £750,000 after 30 years or £300,000.

The below table highlights how my portfolio — starting with £15,000 and growing at 10% annually — would benefit from additional contributions.

Zero Contributions£200 a month£20,000 a year
10 years£40,605.62£81,574.62£366,647.35
20 years£109,921.10£261,794.87£1,318,571.33
30 years£297,560.99£749,658.58£3,895,469.03

And for context, £749,658 would be enough to generate around £60,000 annually when invested in dividend stocks paying 8% on average.

Picking for growth

There’s no point talking about the dividend stocks I’d buy in 30 years. Instead, I need to focus on the stocks I’d buy today to get my portfolio to grow, like Vertiv (NYSE:VRT).

Why would I buy Vertiv to help my portfolio grow? Well, it’s operating in a highly exciting sector, providing infrastructure for data centres. This sector’s booming, driven by demand for artificial intelligence (AI).

Analysts suggest that data centres will represent 20% of global energy demand by 2025. I think that really highlights the size of the opportunity.

Vertiv also has momentum — it’s up 412% over the past 12 months — and its valuation metrics are still attractive. The company has a price-to-earnings-to-growth (PEG) ratio of 0.74, suggesting the stock’s vastly undervalued.

Of course, the caveat is that the forecast growth may never be achieved. While I’m wary of that, I still think Vertiv is an excellent investment opportunity.

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 no positions in any of the stocks mentioned. The Motley Fool UK has recommended Hargreaves Lansdown 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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