Let’s say I had no savings, no experience with stocks, and was starting at 40 years old. Still worth investing? Without a doubt, if you ask me. And even putting away £200 a month could hand me a yearly second income of £10,653. Here’s how.
My first step is to carve out £200 a month. Not to say this is easy. Anyone who can save cash in this day and age should be applauded.
But if I can find room in my budget, I’d rather direct it to building a lifelong second income than a couple of takeaways and some tat I found online.
Where to invest
Even still, £200 isn’t going to do a whole lot by itself. One decade of diligently saving that only brings me £24,000. What I’ll need is a powerful wealth-building method that pays out a big multiplier on the amount I put in.
Buy-to-lets are one option. Rental yields of 3%-5% aren’t too shabby, but taxes and the work required make it a no for me. Savings accounts offer up to 6% now. Although, I’d avoid these too as the rates will come down as interest rates are cut.
The best place? Well, Vanguard released a report recently spelling out what many of us already know. The report found UK stocks returned 9.18% from 1902 to 2022. The upshot? Stocks are the best place to grow wealth and build a second income.
Hang on a minute, the stock market? Won’t I be up against algorithms making trades in fractions of a second? Or City of London bankers with inside connections and data-filled terminals?
Get rich fast?
Well, the answer is no, not really. I don’t intend to watch lines zip up and down on a chart. And I don’t plan to work a second job processing hundreds of trades a day. The way I invest is, to be honest, quite boring.
I follow the Warren Buffett approach. Buy good companies and don’t overpay. Sound exciting? It shouldn’t. But it’s a proven recipe for long-term wealth building and one of the simplest ways to start investing in stocks – even for someone who’s never done it before.
If I follow this approach with my £200 a month, I won’t get rich fast. After the first year, I’ve saved £2,400 and my extra 9% (assuming the average UK stocks return) would give me £216. Sounds okay, I suppose. But where’s my juicy second income?
Well, the funny thing about investing in stocks is how little happens early on. In the first year, two years, or even five years, the growth is minimal. It looks like nothing is happening. Even 10 years in, my 9% would only get around £3,000.
Reposition
But if I let my wealth grow from the age of 40 to 65 – with a cool 25 years of compounding – then the total deposits of £60,000 would grow to £230,061.
A 9% return or any other is not guaranteed of course, and I can lose money investing like this.
But if I achieve my goal, I may reposition my portfolio to focus on dividends. By buying the shares in companies that pay a consistent income, a 5% withdrawal isn’t overly challenging. I could then receive £10,653 each year and I’d hope to receive that for the rest of my days.
