Turning an empty ISA into £20,185 of yearly extra income… in just 15 years

We’d all love an extra income, whether it’s for retirement or to top up our earnings. Dr James Fox explains how to do it when starting with nothing.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Close-up of British bank notes

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.

I’m sure many of us have had the thought: “If only I had some extra income to make life a little bit easier or more enjoyable.

Well, it’s certainly possible. It just requires time, effort, and plenty of commitment.

Time

Time is one of the most crucial factors when trying to harness the power of compound returns. The longer my investment continues in the market, the more time it has to benefit from compounding. This occurs as my investment generates returns. And those returns, in turn, generate more returns.

Should you invest £1,000 in Ecora Resources Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Ecora Resources Plc made the list?

See the 6 stocks

Over time, this compounding effect can significantly impact my investment’s growth and potential for even larger returns. As such, starting early and giving my investments time to compound can have a substantial impact my portfolio overall growth.

Billionaire investor Warren Buffett is the perfect illustration of this. Yes, he’s invested well, but as he says, he’s a beneficiary of good genes, being American… and compound returns. This is because a compound returns strategy leads to exponential growth and, at 92, his investments have had plenty of time to compound.

This is why many parents will start a fund for their children before they’re even born. Allowing £100 a month — the size of a child benefit in the UK — to compound over 20 years with a 10% annualised return would create a portfolio worth over £75,000.

Committed investment

However, what if we’re later in life and we’re looking to create a second income to supplement our pension or late-career income? Well, we may be looking at a shorter timespan, and therefore there’s less opportunity for time to do its thing. But it’s still possible to turning nothing into a sizeable income-generating portfolio.

Firstly, I’m going to want to use my Stocks and Shares ISA. That’s because the wrapper gives me the ability to earn tax-free dividends — capital gains are free of tax too. This is hugely beneficial when I’m targeting passive income.

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.

Monthly contributions are key when starting with nothing. Obviously, we need to build our portfolio, and there’s nothing better than disciplined and scheduled saving — ideally through automated saving. It also allows us to benefit from pound-cost-averaging.

How it works

If we’re working with a 15-year timeframe, we may need to contribute more, and continually increase that contribution. Here, I’ve assumed a monthly contribution of £400, while increasing the size of that contribution by 5% annually (keeping up with inflation or personal salary growth).

The other variable is annualised portfolio growth. Of course, this varies hugely depending on the quality of the stocks I chose — if I pick poorly, I could lose money. This is why it’s very important that I research my stocks well.

In this calculation below, I’m assumed a strong 10% annualised returns.

Portfolio sizeExtra income generation
5 years£33,900.74£2,909.26
10 years£99,044.06£9,000.01
15 years£218,179.34£20,185.31

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won't want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we're giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

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 no position in any of the shares mentioned. 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.

More on Investing Articles

Investing Articles

Prediction: 12 months from now, £5,000 invested in Tesla stock could be worth…

Tesla stock has endured a miserable year so far, falling by 29%. Muhammad Cheema takes a look at how it…

Read more »

Investing Articles

See what £10,000 invested in Tesla shares at their mid-December peak is worth today 

As the world absorbs the full scale of Donald Trump's tariffs, Tesla shares are reeling. Investors who bought the stock…

Read more »

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Dividend Shares

2 ‘safe’ LSE dividend stocks to consider as global markets sell off

As global markets experience high levels of volatility due to economic uncertainty, investors are piling into these ‘safe-haven’ dividend stocks.

Read more »

Investing Articles

US stock market rout: an unmissable opportunity for investors?

His tech-heavy portfolio has been smashed by Trump’s tariffs. However, Dr James Fox believes there could be some opportunities in…

Read more »

Investing Articles

After a 13% ‘Trump tariff’ fall, is the Barclays share price too cheap to miss?

Does the Barclays share price fall mean we should all panic and run screaming from the stock market? Nah, of…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

2 investment trusts to consider for a Stocks and Shares ISA

These two investment trusts have a different focus -- but our writer sees both as worth considering, one more for…

Read more »

Investing Articles

Deutsche Bank reiterates Buy rating on 9.6% yielding FTSE 250 stock that was “most shorted in UK”

Our writer investigates why a major broker remains optimistic about a FTSE 250 stock that was once the most shorted…

Read more »

Investing Articles

2 things to remember when stock markets are turbulent

US trade policy has rattled the stock markets in New York, London and elsewhere. Our writer outlines a couple of…

Read more »