For many people, a second income means financial freedom, making their lives easier by reducing financial stress.
It can provide extra funds to pay off debts, save for emergencies, invest for the future, and enjoy more leisure activities. This added financial cushion offers greater security and flexibility, enhancing overall quality of life.
However, many prospective investors will be starting their journey to a second income with nothing at all. And for them, the idea of earning a sizeable second income may seem rather farfetched.
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Fear not. Here’s how it can be done.
A time-tested strategy
I’m going to need to start by putting money aside every month. That’s the only way to get going if I don’t have any savings. This could be as little as £20 a month, or £50 a month with larger broker platforms like Hargreaves Lansdown.
However, if I want to make a real difference in the long run, the bigger the better. For the sake of this example, I’m saying £300 a month, which increases by 2% annually.
Next, I’d need to reinvest all my returns year after year. This allows me to benefit from something called compound returns. These returns are truly groundbreaking, allowing our funds to grow exponentially — faster as time goes on.
Take a look at how my money could grow in the chart below.
As we can see in this example, after 20 years, I’d have £259k, assuming an annualised return of 10% (which isn’t guaranteed). This would be a good return for a novice investor, but the best investors can certainly achieve much better.
After 20 years, I could either move towards a dividend-focused portfolio, and perhaps earn around £18,000 annually, or take the 10% annual growth as a second income.
Investing wisely
Of course, this wouldn’t be possible unless we make the right investments. Many novices make the wrong decisions and end up losing money.
Instead, we need a diverse portfolio or well-chosen investments. One stock that I believe can drive returns in excess of 10% annually is Super Micro Computer (NASDAQ:SMCI).
The company’s rackmount servers and graphics processing unit (GPU) servers have made it an essential enabler of the artificial intelligence (AI) revolution.
Its share price has soared, but it appears to have much further to go. The average share price target is $1,066, inferring the stock is currently discounted by 27.6%.
One concern raised by some analysts is that hyperscalers — companies investing vast amounts of money in AI and data centres like Meta — are front-loading their spending, thus making Super Micro’s long-term prospects less exciting.
However, I don’t subscribe to that view. Data centres will demand 20% of the world’s power supply in 2025 and Super Micro, with its proprietary cooling technology, should be in prime position to benefit from long-term trends.
