To get a decent second income from the UK stock market, we’d need a fair sized pot of cash, right?
Ultimately, yes. But it might be more achievable than we think.
I was talking to a friend recently, who thinks stocks and shares are only for the rich. And if you haven’t got a huge pile to invest, forget it.
He has no savings, but he has a good income. And he could put aside £500 per month if he wanted. Oh, and he’s still fairly young.
I reckon he’s much better off than he thinks. And I know what I’d do in his position.
Drip feed into an ISA
I’d drip feed that £500 each month into a Stocks and Shares ISA.
The big ISA providers these days will let us set up monthly transfers from as little as £25. And we can add any extra cash when we like.
It wouldn’t matter if I didn’t know which shares I wanted. Just having the money out of my bank account would reduce the temptation to spend it.
But, here’s the big question.
How much could my £500 per month build up to in, say, 20 years?
Different returns
That depends on the rate of return we can get.
Over the very long term, UK shares have averaged around 7% per year. I’d aim to beat that, by choosing strong FTSE 100 dividend stocks.
And over the past decade, the average Stocks and Shares ISA return has been very good at 9.6%. Still, whatever we get, the miracle of compounding can build us an impressive pile of cash.
Sticking with 7% per year, and buying new shares with any income, after 20 years I could be sitting on a £255,000 ISA pot. That’s more than a quarter of a million pounds!
And it could pay more than £17,000 per year in income. All tax free.
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The reinvestment difference
What if my returns are half dividends (with the other half from share price gains), and I take and spend the cash?
That would drop my total, under the same conditions, to £173,000. I’d forfeit a whopping £82,000 of my final total.
If I can match the past decade of ISA returns, with 9.6% per year? Well, my monthly £500 could grow into £345,000 in 20 years.
And if I can keep that rate up, I’d nail my £33,000 second income.
The cash alternative
Some Cash ISAs offer 5.4% per year now, and I can’t ignore that. It’s guaranteed too (for the duration of the deal), so it comes without the stock market risk.
At that rate, I could still build up over £200,000 in 20 years.
The trouble is, today’s rates are unusually high. When the Bank of England base rate drops, they’ll have to fall. So it’s stock and shares for me, for the long term.
Anyway, that’s how I’d invest £500 per month. We must all make our own choices, based on how we see the risk.
