What do we want from our savings? For me, it’s all about building a long-term second income.
In the UK in 2022, the average savings account held around £7,500. That was boosted by the bigger savers, so the median was down at about £2,000.
But these figures vary enormously depending on who we ask. So let’s think about starting today with £5,000 in the bank.
Stocks and Shares ISA
With that amount, assuming it wasn’t money I’d need in the short term, I’d transfer it straight to a Stocks and Shares ISA. I might not know which shares to buy. But at least having the cash there would motivate me to do a bit of research.
Now I can’t look at ISAs without thinking first about a Cash ISA. They pay guaranteed returns, so there’s less risk than from the stock market.
And, right now at least, we can get more than 5%. But rates change over time and they surely won’t stay up there when interest rates fall.
ISA returns
A £5,000 pot isn’t really the kind of cash that retirement dreams are made of. So it would need topping up over the years. But I reckon it’s a big enough sum to make a good start.
In the past decade, the average Stocks and Shares ISA return came in at 9.6%.
I don’t think we’ll see returns that high in the long term. But when we think that was over the pandemic and the stock market crash, it’s quite remarakble, isn’t it?
It shows to me that stock market investing has to be for the long term. And the longer we stay in, the less risk we face.
How much income?
With that rate of return, a £5,000 pot could net us £480 a year in income. That’s not going to buy a new car every year.
What if we reinvest our annual dividends in new shares? In 20 years, it could grow to more than £31,300, without adding a single extra penny. And that could then mean £3,000 a year as a second income. We’re getting there.
Now suppose we do add more money, say £200 a month?
What size retirement pot?
That could get us close to £170,000 in 20 years. And at 9.6%, we could have £16,000 in annual income.
But I have to say I’ll be very surprised if the UK stock market generates those returns in future decades. The average over the very long term has come out at around 7% a year.
We can’t guarantee even that, of course. But it’s a target I’d be happy with — everyone has to think about their own take on risk.
So what might it mean?
£8,500 a year?
Starting with our £5,000, then adding an extra £200 a month, could build us a pot a shade over £121,400 in 20 years.
And we could then take our £8,500 income each year. Assuming we still average 7%.
As I say, we can’t be sure what the future holds. But I think it’s an inspiring target?
The post £5,000 in savings? Here’s how I’d aim to build it into an £8,500 second income appeared first on The Motley Fool UK.
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Views expressed 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.
