Yahoo Finance £20,000 in savings? Here’s how I’d aim to turn that into a £46,738 annual second income
Twenty grand is a good chunk of money to get started in investing. Indeed, it’s more than most start off with, and it’s easily enough to get the ball rolling towards a substantial second income in future.
If I had such a sum to invest today, here’s what I’d do.
Getting started
My first choice would be to put this money in a Stocks and Shares ISA instead of a Cash ISA. Doing so would open up a whole world of tax-free possibilities to grow my wealth faster over the next few years.
I’d be able to invest in high-quality UK dividends shares and US tech juggernauts like Amazon.
I mention the e-commerce giant because I’ve just answered the door and received one of those familiar brown boxes. It was a replacement charger for my Kindle Fire. I ordered it less than 24 hours ago!
As well as shares like these, I could also put my money in exchange-traded funds (ETFs) and investment trusts.
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.
A FTSE 100 share
So, what type of investment would I begin with? Well, one starter stock in my ISA would be Scottish Mortgage Investment Trust (LSE: SMT).
The FTSE 100 constituent has built a portfolio of exciting growth stocks across both public and private markets. Investing in this would give me instant diversification across around 100 companies, including Amazon, Tesla, and Spotify.
I’d also get exposure to the extraordinary progress at SpaceX, whose shares I can’t buy on the public market.
Yesterday (14 March), Elon Musk’s re-useable rocket company carried out the third test of Starship, the largest and most powerful spacecraft ever.
Remarkably, it flew halfway around the globe for the first time. And this test lasted around 50 minutes compared to a combined total of 12 minutes from the previous two.
If Starship is successful, the massive payloads and reduced cost of accessing space would turbocharge the development of the commercial space economy.
SpaceX’s competitive advantage would become truly extraordinary.
Of course, this isn’t guaranteed, and there are inherent safety risks. It isn’t called rocket science for nothing!
Still, the ongoing progress at holdings like SpaceX should give a boost to the value of Scottish Mortgage over time.
Now, the shares do carry an above-average risk of volatility. That’s because many of the trust’s holdings are either highly valued or hard to ascribe an accurate valuation to because they’re private companies.
Therefore, the stock is only suited to long-term investors.
The path to £46k
By building a portfolio of such investments, I could realistically aim to grow my wealth with average annual long-term returns of 9%. That figure isn’t certain, but it is the ball-park average from stocks over the long run.
In this case, my £20k compounded over 25 years would hypothetically become £172,461 (excluding any platform fees). Not bad.
However, the real magic would come from me adding more cash along the way.
For instance, if I invested a further £9,000 a year — the equivalent of £750 a month — while still generating a 9% return, I could get to £934,769 over the same period.
From this giant sum, I could switch my portfolio to dividend stocks with an average 5% yield, leaving me with a potential £46,738 annual second income.
The post £20,000 in savings? Here’s how I’d aim to turn that into a £46,738 annual second income appeared first on The Motley Fool UK.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Ben McPoland has positions in Scottish Mortgage Investment Trust Plc and Tesla. The Motley Fool UK has recommended Amazon and Tesla. 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.
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