How to aim for an eventual second income worth up to £57k on a £37k salary
With the cost of living on the rise, earning a second income can be enormously beneficial for UK households. Even a few extra hundred pounds a month can go a long way for some families. The good news is that the average worker in Britain is likely more than capable of building a second income with the stock market.
In 2024, the median average salary in the UK stood at £37,430. Following the general rule of saving 10% of gross income, that means, on average, an individual should aim to put aside £3,740 each year, or roughly £310 a month. That’s more than sufficient to kick-start an investment portfolio. And when left to run for several years or even decades, a well-constructed portfolio can deliver ample passive income.
Crunching the numbers
Let’s say an investor has created an emergency fund, wiped out their outstanding debts and is now ready to start building wealth in the stock market over the next 20 years. How far can they potentially get with £310 a month?
With an index fund strategy, the average return investors can expect to earn each year is likely 6-8%. And investing at this rate for 20 years would yield a portfolio worth somewhere between £143,233 and £182,596. Taking the midpoint and following the 4% withdrawal rule, that roughly translates into a second income of £6,517 a year or £543 a month.
Obviously, that’s not life-changing. But it’s significant, especially since investors don’t actually have to do any work for this extra income.
Taking things further
What if an investor wants or needs to earn more, such as by establishing a second income in preparation for retirement? Assuming they’re unable to save more money each month, turning to a stock-picking strategy might be the answer.
Looking at 3i Group (LSE:III), the shares of this private equity and infrastructure investment firm have vastly outperformed the FTSE 100 over the last decade. In fact, it’s delivered a total return to shareholders of 667%. That’s an average annualised return of 22.6% — enough to transform a £310 monthly investment into over £1.4m, or a £57,320 second income if it can be maintained for 20 years.
So the question is, can 3i keep up its growth?
Digging deeper
The average consensus among analysts is that the share price could rise to 4,140p by this time next year – a 7% jump paired with an extra 1.7% from dividends. While encouraging, that’s notably slower than its historical growth rate.
A large chunk of its recent historical success emerged from the strong performance of its investment in Action – a Dutch discount retailer. Since 2011, Action, as a part of 3i’s investment portfolio, has grown significantly and now represents around two-thirds of the total.
Portfolio concentration opens the door to larger returns. However, it also introduces dependency and valuation risks. If Action starts underperforming versus other discount retailer competitors, the adverse impact on 3i could be significant.
At the same time, the group’s other private equity investments expose the bottom line to interest rates as smaller private enterprises are far more sensitive to economic conditions. Nevertheless, 3i’s track record suggests management knows how to find promising opportunities.
That’s why, despite the risk, the business might deserve a closer inspection by investors seeking to build a long-term second income.
The post How to aim for an eventual second income worth up to £57k on a £37k salary appeared first on The Motley Fool UK.
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More reading
- Could £300 a month invested in US and UK shares reach a million by retirement?
- My favourite UK stock is up 365% in 5 years and analysts still say it’s a strong buy!
- £10,000 to invest? Here’s how an investor could aim to turn that into a £2,000 second income
Zaven Boyrazian 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.
