No savings? Here’s how I’d turn an empty ISA into a second income worth £18,000

Millions of us have the goal of a second income, but many Britons turn to property. Our writer explains how he’d use stocks to transform his life.

| More on:

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.

Young black colleagues high-fiving each other at work

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.

For many people, a second income means financial freedom, making their lives easier by reducing financial stress.

It can provide extra funds to pay off debts, save for emergencies, invest for the future, and enjoy more leisure activities. This added financial cushion offers greater security and flexibility, enhancing overall quality of life.

However, many prospective investors will be starting their journey to a second income with nothing at all. And for them, the idea of earning a sizeable second income may seem rather farfetched.

Fear not. Here’s how it can be done.

A time-tested strategy

I’m going to need to start by putting money aside every month. That’s the only way to get going if I don’t have any savings. This could be as little as £20 a month, or £50 a month with larger broker platforms like Hargreaves Lansdown.

However, if I want to make a real difference in the long run, the bigger the better. For the sake of this example, I’m saying £300 a month, which increases by 2% annually.

Next, I’d need to reinvest all my returns year after year. This allows me to benefit from something called compound returns. These returns are truly groundbreaking, allowing our funds to grow exponentially — faster as time goes on.

Take a look at how my money could grow in the chart below.

Created at thecalculatorsite.com

As we can see in this example, after 20 years, I’d have £259k, assuming an annualised return of 10% (which isn’t guaranteed). This would be a good return for a novice investor, but the best investors can certainly achieve much better.

After 20 years, I could either move towards a dividend-focused portfolio, and perhaps earn around £18,000 annually, or take the 10% annual growth as a second income.

Investing wisely

Of course, this wouldn’t be possible unless we make the right investments. Many novices make the wrong decisions and end up losing money.

Instead, we need a diverse portfolio or well-chosen investments. One stock that I believe can drive returns in excess of 10% annually is Super Micro Computer (NASDAQ:SMCI).

The company’s rackmount servers and graphics processing unit (GPU) servers have made it an essential enabler of the artificial intelligence (AI) revolution.

Its share price has soared, but it appears to have much further to go. The average share price target is $1,066, inferring the stock is currently discounted by 27.6%.

One concern raised by some analysts is that hyperscalers — companies investing vast amounts of money in AI and data centres like Meta — are front-loading their spending, thus making Super Micro’s long-term prospects less exciting.

However, I don’t subscribe to that view. Data centres will demand 20% of the world’s power supply in 2025 and Super Micro, with its proprietary cooling technology, should be in prime position to benefit from long-term trends.

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.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. James Fox has positions in Meta Platforms and Super Micro Computer Inc. The Motley Fool UK has recommended Hargreaves Lansdown Plc and Meta Platforms. 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

Should I sell my FTSE All-Share index fund and buy a S&P 500 tracker instead?

Harvey Jones is wondering whether now is a good time to invest more money in the S&P 500, after a…

Read more »

Investing Articles

Should I buy dirt-cheap BT shares after the recent pullback?

BT shares were on the up but now they're sliding again after the board trimmed full-year guidance. Now Harvey Jones…

Read more »

Investing Articles

Up 28%, can the easyJet share price keep rising?

The easyJet share price has gained altitude over one year but plunged over five. Is now an attractive time for…

Read more »

British Isles on nautical map
Investing Articles

Should I buy more BAE Systems shares at 1,350p?

BAE Systems shares have had a fantastic run since early 2022, yet still don't appear overvalued. Is it now time…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

7% yield and a cheap valuation! Is this one of the best shares to buy this month?

Christopher Ruane has been looking for cheap shares to buy. This one has a 7% dividend yield, so is it…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Should I buy National Grid shares for the big dividend before it’s too late?

This year's price weakness has left National Grid shares on what looks like a tempting valuation. I hope it doesn't…

Read more »

Investing Articles

There are now 5,000 ISA millionaires! See the surprising UK dividend shares they’re buying

The number of ISA millionaires is growing all the time and guess what? They're really into blue-chip dividend shares listed…

Read more »

Blue NIO sports car in Oslo showroom
Investing Articles

Down 38% in weeks! Time to snap up NIO stock?

NIO stock's more than doubled in value over the past five years but has been on a wild ride lately.…

Read more »