Right now, second incomes are a hot topic. In the current financial environment, everyone is looking to generate a bit of extra money on the side.
The good news is that generating a second income has never been easier. With that in mind, here’s a simple three-step investment plan to create £500 a month.
Step 1. Setting up the right account
The first step in my plan involves opening a Stocks and Shares ISA. This is a type of investment account in which all gains and income are tax-free.
The tax-free feature is key. If I was to generate £10k in income within this type of account, I wouldn’t have to pay a penny of Income Tax on it.
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.
Step 2. Building up capital
The next step involves building up a large lump sum, in order to generate the second income. That £500 a month equates to £6,000 a year.
How much capital would be required to create that much income consistently?Well, it would depend on the rate of interest/yield that was achievable.
But let’s assume that in the future, it’s possible to achieve a yield of 6% (more on this in step three).
In this scenario, an investor would need to build up £100,000 to generate an income of £6,000 a year (£100,000 x 0.06 = £6,000).
Now, building up this amount of capital may sound like a daunting task. However, with a regular savings plan and a decent investment strategy, a £100k goal is very achievable, even starting from scratch.
For example, I calculate that if an investor puts £1,000 a month into an ISA and achieves a return of 8.5% a year on their money by investing in diversified portfolio of shares (The Motley Fool could be a good source of investment ideas here), they could build £100k in a little over six years.
Of course, picking the right stocks, they might be able to get to £100k much faster.
For example, having invested in Tesla five years ago, they would have made almost 10 times their money.
Step 3. Investing in income-generating assets
The final step in my plan involves investing the capital in a mix of income-generating assets to secure the second income.
Now, if I was looking to generate a yield of 6%, I’d take a multi-pronged approach. I’d have some money in high-interest cash savings products (eg Cash ISAs) and bonds.
And then I’d have some money in dividend stocks. These pay out of a proportion of company earnings to shareholders in cash on a regular basis.
And they often have very attractive yields. For example, HSBC shares currently offer a yield of around 8%.
I reckon a 6% yield should be very achievable with this combination of dividend stocks, bonds, and savings accounts.
