Here’s how I’d aim for a second income of £1,000 a month, with just £10 a day

How much do we need to build a decent second income? With enough time, we could do it with a surprisingly small but regular amount. Here’s how.

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We’d all love to earn a second income to boost our cash, wouldn’t we? Well, we don’t have to be super rich to do it, and we might not have to take too much risk either.

No, the secret behind my approach is to invest little, but regularly, and keep it up for the long term.

But just £10 a day? I know people who spend more than that on their lunch, every day of the working week. Even allowing for holidays, that could still add up to nearly £2,500 a year.

I’d rather take my own sandwiches and make that money work for me on the UK stock market instead.

Stretching my tenner

Let’s stretch my £10 a day a little, and not just include working day lunch monies. I’ll be bold, and think about £10 every day, weekends, holidays, the lot.

It’s still only £70 a week, and people spend more than that on a single night out.

I can’t just buy £70 in shares each week, as the fees I’d have to pay would eat up a lot of it. But I can pay the money into my Stocks and Shares ISA and let it build until I have enough for an investment.

First though, why the stock market? Why not a Cash ISA, or bonds, gold… or any one of a huge number of things out there?

Best choice

Well, over the past century and more, the UK stock market has beaten cash, bonds etc easily. Yes, there’s more risk. But the longer I stick at it, the less my risk will be.

Other people’s views differ, but buying UK shares is the clear winner for me. The question is, what rewards might I get from it?

In the past decade, the average Stocks and Shares ISA return has come in at 9.6% a year. Some years were bad though, like the 13% loss in 2019-20. That’s where the long-term thing comes in.

Over the longer period, the FTSE 100 has averaged around 7%, with the FTSE 250 hitting 11%.

Compound returns

Let’s look at a stock I hold, insurer Aviva (LSE: AV.). It has a forecast dividend yield of 7%, and I’ll hope for an average share price gain of 2% a year.

So what if that keeps up and I reinvest all my dividend cash into new Aviva shares each year?

Running the numbers, I work out that I could accumulate a healthy sum of £195,000 in 20 years. From that, my 7% annual dividends could pay a second income of £13,650 a year, beating my target of £1,000 a month.

In reality, putting all my eggs in one basket is far too risky. Just look at the chart below to see how volatile the Aviva share price has been.

Safety first

So I’d go for a diversified selection of different stocks in different sectors. That’s an absolute must.

But I must be in with a good chance of getting somewhere between the FTSE 100’s 7% and the FTSE 250’s 11%, mustn’t I?

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.

Alan Oscroft has positions in Aviva 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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