Saving £4 a day by skipping daily coffee shop visits could be a powerful way to build a substantial second income through strategic investing. It might not sounds like much, but these investments could build over time resulting in a second income worth £65,000!
Here’s how investors can make it happen.
Investing with a model for success
By foregoing that £4 each day, investors can save £120 a month, or £1,460 a year. While this may not seem like much initially, when invested wisely, these savings can grow substantially, due to the power of compound interest. And in order to build a diversified portfolio, every month, investors can pick two stocks.
Of course, the growth of investments will be dependent on the quality of those investment decisions. Poor investments decisions will result in investors losing money. However, with wise investments, £4 a day could be worth nearly £900,000 after 30 years. That’s assuming a strong 15% annual growth rate — which could generate around £65,000 as a second income.
Admittedly, 15%’s an ambitious long-term rate of growth. At a growth rate of 5%, investors could generate £10,000 per year after 30 years, while 7% growth could lead to £15,000 in annual income. And investors may lose money if they make poor investment decisions.
However, wise investments may generate those stronger returns. Over the last year I’ve managed more than 50%, although this incredible pace will be unsustainable in the long run.
Personally, I employ a model to choose investments that focuses on valuations, revisions to earnings estimates, share price momentum — as we don’t want to wait too long for growth — profitability, and growth expectations. Some investors may prefer other models, such as a deep value approach, putting less emphasis on momentum.
A stock worthy of consideration
So what stock could generate strong returns for investors? Well, airlines are among the best-ranking sectors at the moment, offering attractive valuations while benefitting from share price momentum going into 2025.
As such, investors may wish to consider IAG (LSE:IAG) shares this month.
The stock has great momentum with investors increasing bullish about the company’s trajectory. This is matched by valuation data. At 6.8 times forward earnings, the stock is substantially cheaper than peers including Ryanair, Delta, and Qantas.
Moreover, the firm that owns British Airways also boasts great margins and is expected to deliver strong revenue growth, likely a reflection of its fuel hedging strategy and its broad product offerings.
Nonetheless, as investors, we’ve always got to be wary of what might go wrong. This could include higher for longer interest rates which would reduce discretionary spending or even future Covid flare-ups.
However, the forecasts are positive for IAG with one notable area being fuel. Jet fuel prices are the lowest they’ve been in two years and with talk of an oil glut in 2025, it’s possible that they could fall further. For context, fuel accounts for around 25% of operating costs.
