Earning a second income does not necessarily mean taking on a second job. Many people earn extra cash on a regular basis by investing in shares that pay them dividends.
Here is the five-step plan I would implement if I wanted to target a second income of £500 each month.
1. Start saving
To buy shares I will need money. So my first move would be to get into a regular saving habit, putting aside a set amount each week or month, and putting it into a share-dealing account, or Stocks and Shares ISA.
2. Learn about investing
Is Apple a great share to buy? Different people will have different answers to that question. Some might say Apple is a great business, thanks to its large sales and iconic brands.
But just having a good business does not necessarily make a share a rewarding buy. Other factors come into play, like the share valuation at the time of purchase, and the company’s balance sheet.
Ignoring such factors leads many novice investors to make costly mistakes. Before investing a penny of the money I saved, I would therefore learn more about how the stock market works and what drives share valuation.
3. Build a shopping list
Using that knowledge, I would then start pulling together a list of companies I would like to invest in at the right price. Some might be available at that price today, while in other cases a company may look expensive now but be on my watchlist for the future.
Even the best company can run into unforeseen difficulties. So I diversify my portfolio across a range of different shares.
4. Grow a portfolio
If I can earn an average yield of 7%, for example, hitting my second income target will need me to invest nearly £86,000.
If I had that sort of money to spare, I could invest it and try to hit my target in the near future. But even starting with nothing, I believe I could still reach my objective.
By saving regularly and initially compounding (reinvesting) the dividends rather than drawing them down as a second income, I could build to my target over time.
For example, investing £300 a month at the 7% average yield and compounding the dividends, after 15 years I should hit my target of earning an average monthly second income of £500.
5. Earn without working
At that point I could sit back and earn a regular second income, even if I put no more money into my portfolio.
Or I could keep investing and set a bigger target for my future dividend earnings.
With the right investing framework and a long-term mindset, fairly modest regular contributions could ultimately help me build a sizeable and growing second income.
