Thousands, if not millions, of us invest for a second income. We might be aiming for a little extra income to help us pay the bills, or something that can pay for a family getaway.
Either way, earning a second income can be easier than many of us anticipate, even if we’re starting with no money in the bank. The only caveat is that it won’t happen overnight. It takes time.
The strategy
If we’re starting investing with zero funds, we’ve got to make a commitment to contribute a proportion of our salary. Otherwise we’d simply have no way to fuel our investment journey. We could start with as little as £50 a month, but ideally I’d be putting more money to work. One reason for this is that we have to recognise the impact of fixed fees on our investments.
For example, I use Hargreaves Lansdown — which is the most expensive brokerage in terms of fixed fees. Its dealing fees start £11.95. As such, it would be hard to efficiently invest £50 a month. The answer is finding a cheaper brokerage — which may not be as good — or putting more money aside each month.
I’m also going to want to utilise my Stocks and Shares ISA. The ISA is an excellent vehicle for investing because it shields my gains from capital gains and tax. While this means I can withdraw a second income free of tax in the future, it also means my portfolio’s growth won’t be hampered by capital gains.
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.
And finally, I need to accept that I’m going to have to reinvest my gains for a number of years until my portfolio reaches a position where it could generate a sizeable second income. And the longer I leave it, the faster it grows… that’s compound returns.
Investing for growth
It may take a while for our monthly investments to turn into something much bigger. A key determinant of how long it takes is the success of our investments. We shouldn’t just invest in companies we like or because of a hunch. After all, we can lose money.
This is why I invest according to data. And one company I’ve recently invested in is Li Auto (NASDAQ:LI). Electric vehicle (EV) manufacturers have dipped in recent weeks following some rather unimpressive data from across the sector. However, I see this as an opportunity, and the data is strong.
The NEV (New Energy Vehicle) manufacturer is currently trading at 15.6 times forward earnings. Of course, that means it’s more expensive than most companies on the FTSE 100. That’s a risk, but this is a growth-focused business. Moving forward, that price-to-earnings ratio falls to 11.4 times in 2025 and nine times in 2026.
Sticking with the data, Li also has a price-to-earnings-to-growth ratio of 0.81. For me, this is one of the most important metrics, although I appreciate that it’s based on expected earnings, which can be wrong.
Moreover, Li has just made its first move into the fully electric space with the Li Mega. The vehicle hasn’t been overly well received due to its looks, but the tech, the range, the charging speeds, all point to future models (there will be three more EVs this year) that might be winners.
I believe Li Auto can supercharge my portfolio’s growth, in turn allowing me to generate a larger second income in the future.
The post No savings in the bank? Here’s how I’d turn surplus salary into a second income appeared first on The Motley Fool UK.
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James Fox has positions in Li Auto Inc. 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.
