Investing like clockwork in the stock market can eventually result in a substantial second income. The more money I put in, the larger the compounded results are likely to be.
Here’s how investing £500 a month in shares could lead me to a £68k yearly income.
First things first
To start, I’d open a Stocks and Shares ISA. This account would shield any capital gains and income from tax, making it a no-brainer for UK investors.
After this, I’d need to save some money to get the roll rolling. Here I’ll assume I can put away £500 a month on a regular basis without overstretching my finances.
This is how that would build up in an ISA without further investing (discounting any interest).
Savings
1 year
£6,000
5 years
£30,000
10 years
£60,000
20 years
£120,000
30 years
£180,000
We can see that saving clearly does build wealth over a long period. Yet, this £180,000 figure would be dwarfed by achieving just average long-term returns from the stock market.
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.
The next level
The combined historical return of the FTSE 100 and S&P 500 averages out at about 8%–10% per year (with all dividends reinvested).
Let’s take a look at those figures again, but this time assuming I invest and secure an average 9% return.
Savings
Invested savings
1 year
£6,000
£6,247
5 years
£30,000
£37,389
10 years
£60,000
£94,917
20 years
£120,000
£183,432
30 years
£180,000
£851,581
This is a powerful demonstration of the difference stock market investing can make over the long term.
The figures start to radically diverge after 10 years, with the final amount over four times larger when invested. This is the power of compounding at work — the process of money making more money over time.
I could invest passively or actively select stocks. The latter presents more risk but theoretically can result in above-average returns. This is my preferred method.
More or less
Now, I’m using historical averages here. There is no guarantee that an annualised 8%–10% return will be replicated in future. It may be less.
However, it could be more if artificial intelligence (AI) proves as transformative as many are predicting.
According to research from McKinsey, radical productivity gains from generative AI have the potential to eventually add $2.6trn–$4.4trn to global corporate profits annually! That will likely boost capital returns, predicts the International Monetary Fund (IMF).
None of this is set in stone, though. The data relies on a scenario where half of today’s work activities are automated between 2030 and 2060.
But this naturally begs a question. If companies replace many millions of employees with AI, then those people unable to find new jobs won’t have an income. And if they don’t have an income, how will they afford to buy the consumer products that many companies make?
Basically, there are many unknowns regarding how all this will play out. The point is that such things could affect and skew average market returns one way or the other.
A sizeable second income
Finally, what I choose to do with this ultimate figure would be dependent on many factors, including my age and financial circumstances.
But assuming I decided to take 8% every year – either through dividends or selling down shares (or both) – then that would give me a figure of £68,126.
Naturally, inflation would diminish the purchasing power of this amount in real terms. Yet it still shows how £500 a month – or the equivalent of around £115 a week – could build me a very attractive second income down the line.
The post How I’d invest £500 a month in stocks to target a £68,126 second income appeared first on The Motley Fool UK.
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Ben McPoland 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.
