Here’s how £10,000 in savings could turn into a second income worth £21,859 a year

With thousands tucked away, this Fool would put it to work to start making a second income. Here, he breaks down how he’d do it.

| 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.

A front-view shot of a multi-ethnic family with two children walking down a city street on a cold December night.

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.

Making a second income is one of the main reasons I and many other people invest. I’m optimistic one day I’ll be able to live off the dividend payments I receive just from owning shares.

In the decades ahead, I want to be financially free and live a lavish lifestyle. That’s the goal, right? That’s why I’m starting as early as possible.

Having some cash savings is always a smart idea. However, the majority of my net worth is tied up in the stock market.

Should you invest £1,000 in Phoenix Group Holdings Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Phoenix Group Holdings Plc made the list?

See the 6 stocks

If I had £10,000 in the bank today, here’s what I’d do.

Open an ISA

The first thing would be to open a Stocks and Shares ISA. This allows every person in the UK to invest up to £20,000 a year in the stock market and pay zero tax on any capital gains made or dividends received. This is a brilliant way for investors to maximise their returns and build wealth.

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.

Target the FTSE 100

There are a number of ways people invest, all with different pros and cons. For me, I’ve settled on buying FTSE 100 shares which I think can produce impressive returns over the long run. It might not be the most exciting, but there’s plenty of proof to suggest it’s highly effective.

Not only are many Footsie companies household names with stable business models, but they also offer some of the best dividend yields out there. The index’s average yield is 3.6%. By comparison, the S&P 500’s is just 1.3%.

One example

One stock I like is the blue-chip insurance business Phoenix Group Holdings (LSE: PHNX). Its share price is up 1.9% so far in 2024. It’s also been gaining pace in the last month, rising 10.7%.

Created with Highcharts 11.4.3Phoenix Group Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

The stock yields a meaty 9.7%, way above the FTSE 100 average. Dividends are never guaranteed. However, its payout has been rising and the business has plenty of cash on its books.

That puts it in a strong position to be able to keep upping its dividend. Management’s also laid out its progressive dividend policy.

The insurance industry’s cyclical. That’s a risk for Phoenix. On top of that, not only do high interest rates cause uncertainty but they can also negatively impact the value of the group’s assets.

But with its thumping yield and strong market position, it’s stocks like Phoenix Group I’d be targeting.

The numbers

Applyingthe 9.7% yield to my £10,000 ought to see me earn £970 a year as a second income. Not bad. But that’s nowhere near my target.

To achieve that, I’d reinvest my dividends along the way to benefit from dividend compounding. So the £970 I received in the first year, I’d use to buy more shares, and so on. What I’d also do is invest £100 a month on top of my initial £10,000.

If I did that, after 25 years, I’d earn £21,859 in passive income. Furthermore, my investment pot would be worth £238,020. That sort of money would go a long way in helping me live a more comfortable life later down the line.

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

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.

Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

More on Investing Articles

Investing Articles

£9k of savings? Here’s how an investor could aim to turn it into a second income of £560 a month

Christopher Ruane digs into the theory and numbers of how an investor could target a chunky monthly second income of…

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

A top S&P 500 value share to consider as markets sell off!

Worried about the outlook for S&P 500 shares in the New Year? Buying value stocks like this tech giant is…

Read more »

Investing Articles

£20k of savings? Here’s how an investor could target £980 of passive income each month

With a £20k pot to deploy, our writer outlines how a long-term investor could target almost £1k a month in…

Read more »

Investing Articles

FTSE shares: a bargain way to start building wealth in 2025?

Christopher Ruane explains how, by buying FTSE 100 shares at what he thinks are bargain prices, he hopes to build…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

3 ISA mistakes to avoid in 2025

Our writer outlines a trio of mistakes investors can make in their ISA, to their cost, and explains why he’s…

Read more »

Older couple walking in park
Investing Articles

3 UK shares to consider as a long-term investment for retirement

Our writer identifies three UK shares with long-term growth potential he believes investors should think about holding until retirement and…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

Could this beaten-down FTSE 250 stock be on the cusp of a recovery in 2025?

After this FTSE 250 financial services stock lost another 24% of its value in 2024, Andrew Mackie sees the potential…

Read more »

The Milky Way at night, over Porthgwarra beach in Cornwall
Investing Articles

Warren Buffett says make passive income while sleeping! Here’s my plan to do so

Billionaire Warren Buffett has said many wise things over the past half a century, including a thing or two about…

Read more »