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Building a second income doesn’t involve jumping into the unknown. It starts with a plan to turn small routine savings into something that matters over time.
With enough time and patience, I think it’s possible to build something that can generate £12,000 a year with an investment of as little as £100 a month. And the plan to do this has three simple steps.
Step 1: find the value of the month
It starts at £100 a month. It’s still possible to build a reasonable second income for less than that, but targeting £1,000 a month is much harder.
Average return from FTSE 100 recently it has been a little over 8.5%. That rate eventually turns a £100 monthly investment into something that could return £12,000 a year.
It takes time – 30 years in fact – to reach a £1,000 monthly payback. And there are no guarantees that stocks will return 8% per year going forward over that long period of time.
Given this, one of the best things investors can do is start right away. And another is to be as consistent as possible in investing that £100 every month.
There is no denying that 360 months is a long time. But the way to think about it is like a marathon – and you can’t get to the 26th mile without going through the rest of the 25th.
That’s why the first step is to be consistent. The gains start small, but it’s surprising how quickly they accelerate over time – for investors who can stay the course.
Step 2: target 8.5% return.
The next step is figuring out how to target an 8.5% annual return. History suggests this is more than likely, but that is no guarantee of future success.
Over time, the best way to aim for this kind of return is to focus on high-quality companies. Even the best businesses will have ups and downs, but I expect them to do well in the long run.
Another example is this Diageo (LSE:DGE). After falling 58% from its high, the stock now comes with a dividend yield of 4.7%, giving investors a head start on the 8.5% target.
The rest of the return will have to come from growth. And the company has faced some challenges in recent years, especially since the rise of anti-obesity drugs that suppress the desire for alcohol.
This is dangerous, but there is another change happening at the same time. In the alcohol industry, beer and wine are losing market share to spirits, where Diageo has a strong position.
My sense is that investors focus on one part of the equation more than the other. And I think that’s created an opportunity that’s worth considering right now.
Step 3: Repeat
The third step is the easiest: repeat the first two. Keep saving, keep looking for stocks to buy, and keep investing for the long term.
That doesn’t mean always buying the same stock (it’s better not to, in order to achieve a diversified portfolio). But different opportunities made themselves available over time.
Earning secondary income by investing in the stock market does not have to be difficult. There is always risk, but investors can give themselves the best chance with a simple plan.
