No savings? Here’s how I’d turn an empty ISA into a second income worth £18,000

Millions of us have the goal of a second income, but many Britons turn to property. Our writer explains how he’d use stocks to transform his life.

| More on:
Young black colleagues high-fiving each other at work

Image source: Getty Images

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.

Read More

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.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

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.

Created at thecalculatorsite.com

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.

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.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. James Fox has positions in Meta Platforms and Super Micro Computer Inc. The Motley Fool UK has recommended Hargreaves Lansdown Plc and Meta Platforms. 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.

More on Investing Articles

Investing Articles

Is this one of the FTSE 100’s best-value growth shares?

Looking for great-value recovery shares to buy today? Based on City forecasts, this could be one of the best that…

Read more »

Investing Articles

Will the Tesco share price hit a 10-year high in 2024?

Up from 200p less than two years ago, the Tesco share price has enjoyed impressive growth lately. Now I'm considering…

Read more »

Electric cars charging in station
Investing Articles

Where will Tesla stock be in 5 years? Here’s what the experts say

The analysts' outlook for Tesla stock in the next few years seems to be all over the place, as the…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Nearing its 12-year low, this FTSE growth stock could be the bargain of the year!

Harvey Jones has happy memories of owning this FTSE 100 growth stock. Now he's wondering whether to take a trip…

Read more »

Investing Articles

BT share price: a bargain or one to avoid?

This Fool has been keeping tabs on the BT share price. Despite looking cheap, he's steering clear of the stock…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

3 reasons why I predict UK shares will soar over the next 12 months!

Our writer believes there are plenty of reasons why UK shares will do well over the next year or so.…

Read more »

Investing Articles

Are these the best stocks to buy after the UK election?

With Labour now leading the UK, change is on the horizon. I'm considering the best stocks to buy based on…

Read more »

Investing Articles

1,000 shares in this FTSE 100 stalwart would give me £525 of dividends!

The FTSE 100 is packed full of stocks offering sizeable dividend yields, but I feel this one is the pick…

Read more »