I remember when I was new to investing. I had no idea where to start or what to do. I put it off for ages. My dithering cost me tens of thousands, looking back. That’s money I could have put towards building a second income.
How I’d target that £20k+
I wish someone had told me to just get started. Once someone starts investing, the money (hopefully) starts to compound and grow. “Time in the market”, as they call it. The longer I wait without investing, the more it costs me.
If I started today, I’d follow these steps for a healthy passive income. I could even target £20,628 a year. Here’s how, step by step.
My first step is a simple one. I need to open an account. One thing we do right in the UK is our ISA accounts. These ISAs – individual savings accounts – are perfect for investing in stocks. Why? Because they offer amazing tax advantages.
Why I need to invest
If I invest in a Stocks and Shares ISA, I avoid both dividend tax and capital gains tax. I can deposit up to £20k a year and avoid these taxes. Sadly, that’s around £1,667 a month. I doubt many of us have that much left at the end of the month, but any amount is worthwhile.
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.
Once I’ve got my account, my second step is to put some money in. A few options are below. But it’s clear the savings don’t amount to very much on their own.
| Monthly saving alone | ||||
| £100 | £150 | £200 | £250 | |
| 1 year | £1,200 | £1,800 | £2,400 | £3,000 |
| 5 years | £6,000 | £9,000 | £12,000 | £15,000 |
| 10 years | £12,000 | £18,000 | £24,000 | £30,000 |
| 20 years | £24,000 | £36,000 | £48,000 | £60,000 |
| 30 years | £36,000 | £54,000 | £72,000 | £90,000 |
So the next step is to invest. What kind of return could I expect from this? Well, the next table shows a few ideas.
I’d aim for a £500k net worth
The FTSE 100 and FTSE 250 are both in the UK and make up the top 350 listed companies here. The S&P 500 is the closest equivalent in the States. The MSCI World Index is another. This one is like a worldwide average for stocks. All have historically offered decent returns.
| FTSE 100 | FTSE 250 | S&P 500 | MSCI World Index | |
| Return | 7.2% | 10.6% | 10.2% | 10.9% |
Those percentages might look small, but they add up. And the returns compound, with the amount possibly getting very big over time. The next graph shows what that looks like.
And remember, I’d look to start as soon as possible. I want this compounding to work for me straight away. This is how I could make the big money.
Next comes my fourth step. Here I’d let my investments grow. Let’s look at what a flat 10% does.
| Saving with 10% return from stocks and shares | ||||
| £100 | £150 | £200 | £250 | |
| 1 year | £1,254 | £1,881 | £2,508 | £3,135 |
| 5 years | £7,656 | £11,484 | £15,312 | £19,140 |
| 10 years | £19,986 | £29,980 | £39,973 | £49,966 |
| 20 years | £71,826 | £107,739 | £143,652 | £179,565 |
| 30 years | £206,284 | £309,427 | £412,569 | £515,711 |
Okay, now we’re cooking with gas. These returns look very impressive. But I’m after a second income here, so how do I get it?
One important risk
Well, with stocks I have two options. I can sell off part of my portfolio. I withdraw that and it’s my income. The other way is to invest in stocks that pay dividends. These payments go straight into my account from a company’s coffers.
With either method, a 4% return is usually considered a safe amount to withdraw without depleting my nest egg. Here’s what that would look like for the above values.
| Withdrawing 4% a year second income | ||||
| £100 | £150 | £200 | £250 | |
| 1 year | £50.16 | £75.24 | £100.32 | £125.40 |
| 5 years | £306.24 | £459.36 | £612.48 | £765.60 |
| 10 years | £799.44 | £1,199.20 | £1,598.92 | £1,998.64 |
| 20 years | £2,873.04 | £4,309.56 | £5,746.08 | £7,182.60 |
| 30 years | £8,251.36 | £12,377.08 | £16,502.76 | £20,628.44 |
Looks good to me! Although I’ll end on a cautious note.
I’m looking at past returns here as that’s all anyone’s got to go on. But the future is unpredictable. Stocks might not be as lucrative as they were in the past. This is a risk all investors must be wary of.
