£8,800 in savings? Here’s how investors could turn that into a £20,000 second income… with time

Millions invest for a second income. Here, Dr James Fox explains how an investor can generate a life-changing figure from a modest starting point.

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Dr. James Fox

Published 19 June

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

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Turning an initial £8,800 in savings into a £20,000 annual second income is an ambitious but achievable goal. Like anything in life, it requires commitment, learning, and a level-headed approach.

So, let’s find out how it can be done.

There’s a formula for success

There are several parts to the formula, and central to it is harnessing the power of compounding effectively over time. Compounding occurs when investment returns generate their own returns, creating a snowball effect that accelerates portfolio growth. This process is fundamental for building wealth, especially when combined with regular contributions and a disciplined investment approach.

Consider an investor who starts with £8,800 and adds £250 monthly into a diversified portfolio targeting an average annual return of 7%. After 31 years, this portfolio would be worth in excess of £400,000.

At that point, withdrawing 5% annually would provide a second income of around £20,000. Increasing monthly contributions or achieving slightly higher returns could significantly impact the size of the portfolio over the long run.

Regular contributions are crucial because they boost the investment base, allowing compounding to work on a larger amount. Even modest monthly additions accumulate significantly over decades.

It’s also worth noting what can be achieved if an investor maxes out their ISA (£20,000 per year of contributions) and achieves a higher but achievable 10% annualised growth rate. Using 31 years as a comparison point, the below chart shows £8,800 transform into £4.6m.

Of course, this is just an example. Many novice investors lose money chasing get-rich-quick dreams. And I appreciate that I could fall short of 10% annualised returns.