Here’s how I’m trying to build my ISA to earn a £5,000 second income each month

One of the more enjoyable things in life is a second income, especially a tax-free one. Here’s how Dr James Fox is making his income goals a reality.

| More on:
Playful senior couple in aprons dancing and smiling while preparing healthy dinner at home

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.

The Stocks and Shares ISA is simply an excellent vehicle for building wealth and earning a second income. And that’s because it’s shielded from taxation. So if I double my money on a stock, there no capital gains tax. And if I want to take dividends from my holdings, there’s no income tax.

While millions of Britons use a Stocks and Shares ISA to invest, sadly a much greater proportion keep their money in savings accounts or simply have very little savings at all. And with savings accounts offering around 3% annualised growth on average, many Britons will struggle to build wealth.

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.

Even index-tracking investments beat savings

Index-tracking investments consistently outperform savings accounts, offering superior long-term returns. While savings accounts are safer and guaranteed, they provide minimal interest, often failing to keep pace with inflation, the MSCI World index delivered average annual returns of around 11.1% between 1978 and 2024.

This stark difference becomes evident over time. For instance, a £10,000 investment in the MSCI World index in 1979 would have grown to £960,000 in 2024. Index funds achieve this through broad market exposure, low fees, and passive management. They also provide an easy, diversified investment option that allows investors to benefit from overall market growth.

As such, and despite short-term market fluctuations, index funds have proven to be a more effective wealth-building tool than traditional savings accounts.

The maths add up

In the chart below, I’ve shown how my money (£500 of monthly contributions) would grow at 3% — representing a savings accounts — and 11.1% — reflecting the annualised growth of the MSCI World Index over the past 45 years. As we can see, the difference is relatively modest at first, but eventually the 11.1% pulls away over time. That’s simply because of compounding.

By the end of the 30 years, the index tracker’s growing by more than £100,000 a year (although that’s not guaranteed, of course). This is why it pays to start early, and also why my one-year-old has an ISA and a Self-Invested Personal Pension (SIPP)!

Moreover, with £1.1m, I could attempt to earn £60,000 annually in dividends by investing in stocks with an average yield just above 5%.

An investment to consider

Index trackers can be a great way to start investing, but something a little more exciting could be an exchange traded fund (ETF) or trust. And one of the most popular to consider in the UK is Baillie Gifford’s Scottish Mortgage Investment Trust (LSE:SMT).

It invests in growth-oriented stocks with SpaceX now representing the largest holding. It’s also the largest holding in Baillie Gifford’s Edinburgh Worldwide Investment Trust portfolio, indicating a lot of faith from the fund’s management. Scottish Mortgage’s tech-focused investments are also complemented by holdings in luxury stocks, including Ferrari.

The stock’s discounted by around 7.1% versus the estimated value of the fund’s assets. In other words, investors are buying SpaceX and Ferrari shares on the cheap. However, I know some investors will be put off by the valuations of some of the stocks held — like Tesla at 170 times forward earnings — and SpaceX, which isn’t listed and has no stock market-derived value.

Nonetheless, it’s a stock I’ll incrementally buy more of over the years. The managers have a great track record with the shares up 2,666% since inception in 1993.

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 positions in Edinburgh Worldwide Investment Trust, and Scottish Mortgage Investment Trust Plc. The Motley Fool UK has recommended Tesla. 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

Young Caucasian woman with pink her studying from her laptop screen
Investing Articles

Time to buy Nvidia shares before fresh all-time highs?

Nvidia shares began 2025 at an all-time high before a big drop in the last week or two. Our writer…

Read more »

Investing Articles

A top FTSE 100 share to consider for a Stocks and Shares ISA starter portfolio!

While not without risk, a lump sum in this FTSE 100 trust could prove a great way for Stocks and…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

I asked ChatGPT to name the best 5 UK shares to build wealth over 50 – and here they are!

Harvey Jones is looking to build a balanced portfolio of UK shares to fund his final years, and asked ChatGPT…

Read more »

Investing Articles

£10k invested in Scottish Mortgage shares after the DeepSeek crash is now worth…

Harvey Jones thought his Scottish Mortgage shares were heading for a bumpy ride when DeepSeek emerged last month. Then he…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

1 ex-penny stock up nearly 400% in my Stocks and Shares ISA! 

This writer is starting to take notice of a small-cap stock that is 'up' significantly in his ISA portfolio over…

Read more »

Investing Articles

The FTSE 100 index hits new highs! But will Legal & General shares outperform it in 2025?

Legal & General's share price has rocketed almost 8% so far in 2025. Can it continue to outstrip the surging…

Read more »

Investing Articles

Up another 8% in a week! So what’s stopping me from buying IAG shares? 

Harvey Jones is desperate to add high-flying IAG shares to his portfolio before they climb even higher but there's a…

Read more »

Happy couple showing relief at news
Investing Articles

The Bank of England’s slashed its growth forecast but the FTSE 100 doesn’t seem to care!

On the day the UK’s central bank halved its forecast for growth in 2025, the FTSE 100 reached a record…

Read more »