Based in London, James is a freelance investment writer for the Fool UK. He also contributes tobusiness and economics publications, having previously worked as a staff writer and editor. James has a PhD in development studies and has contributed to academic work on global supply chains. He also manages his own investment portfolio.
The content of this article was relevant at the time of publishing. Circ*mstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.
Investing in stocks and shares allows us to earn a second income by leveraging their growth and payments to shareholders in the form of dividends. While many people in the UK may prefer other routes, like Investing in buy-to-let properties, I believe stocks and shares offer the best returns and the most flexibility.
So, how can I turn a £200 monthly contribution into a much larger second income? Let’s find out.
Compounding is key
£200 a month, or £2,400 a year might not sound like a lot of money to put aside, but it adds up over time.In fact, £200 a month is how much I put into my daughter’s Stocks and Shares ISA each month, and it’s adding up nicely.After five months, we’ve experienced 30% growth in addition to the monthly contributions.
Of course, it’s unlikely that this pace of growth is sustainable across the next 18 years, but growth compounds. So, even if my current growth moderates to around 10% per annum — I’m still aiming for a lot more — she’d have £121,113 when she ‘becomes an adult’.
I say this for illustrative purposes as there are many variations as to how we could get to our desired endpoint. If I continued with £200 a month, achieving 10% growth annually, I’d have enough capital to generate £36,469 annually.
However, this requires me to grow me portfolio sensibly over three decades. It’s entirely achievable, because growth compounds. But I need to recognise that poor investment decisions can lose me money.
Growing my portfolio
There are several exceptions, but I tend to look to the US for my growth-oriented investments. Nvidia, Super Micro, Powell Industries, CRISPR Therapeutics are among the investments I’ve made over the past year that have yielded more than 50%.
AppLovin (NASDAQ:APP)is another investment which was been good to me. But I still like it a lot and I’m considering investing more.
AppLovin is a software company specialising in maximising advertising revenue for its clients. It operates within a thriving industry and a great track record of beating market expectations — that’s a great sign.
One area of concern is that its still quite indebted and growth has been unstable historically.However, over the past year, it’s been thriving in tough conditions.
In the fourth quarter, AppLovin reported a earnings per share of $0.49, surpassing expectations by $0.14. Furthermore, revenue for the quarter amounted to $953.26m, marking a significant year-over-year increase of 35.7% and surpassing estimates by $25.23 million.
Nonetheless, the most compelling aspect of AppLovin lies in its projected growth over the medium term, spanning the next three to five years. Although the stock’s forward price-to-earnings ratio stands at a relatively high 31 times, its price-to-earnings-to-growth ratio is an attractive 0.62. This suggests that AppLovin’s growth potential may be undervalued. In fact, on a forward basis, the stock is trading at a modest 13.7 times earnings.
Saving just $200 a month may not sound like a big deal, but that amounts to $2,400 yearly. This extra money can go a long way toward your other financial goals, like saving or investing. Also, aiming at a “reachable” goal, like saving $200 a month, could eventually save much more each month once you get the hang of it.
If you were to invest $200 per month over the course of the next 30 years, that would equate to a total investment of $72,000. That's significant, but it's through the effects of compounding that would get your portfolio to a more than $1 million valuation.
You can put $200 monthly into a high-yield savings account and earn interest as you work to build an emergency fund. Another option is to contribute to a tax-advantaged account, like a traditional IRA, which could be a good move if you want to focus on long-term growth as you plan for your retirement years.
How much should you save each month? For many people, the 50/30/20 rule is a great way to split up monthly income. This budgeting rule states that you should allocate 50 percent of your monthly income for essentials (such as housing, groceries and gas), 30 percent for wants and 20 percent for savings.
How that works, in practice: Let's say you invest $200 every month for 10 years and earn a 6% average annual return. At the end of the 10-year period, you'll have $33,300. Of that amount, $24,200 is money you've contributed — those $200 monthly contributions — and $9,100 is interest you've earned on your investment.
Saving $1,000 per month can be a good sign, as it means you're setting aside money for emergencies and long-term goals. However, if you're ignoring high-interest debt to meet your savings goals, you might want to switch gears and focus on paying off debt first.
To reach $10,000 in one year, you'll need to save $833.33 each month. To break it down even further, you'll need to save $192.31 each week or $27.40 every day. These smaller chunks are much more realistic and simple to comprehend, making it easier to track your progress.
To save a million dollars in 30 years, you'll need to deposit around $850 a month. If you make $50k a year, that's roughly 20% of your pre-tax income. If you can't afford that now then you may want to dissect your expenses to see where you can cut, but if that doesn't work then saving something is better than nothing.
In fact, at the end of the five years, if you invest $1,000 per month you would have $83,156.62 in your investment account, according to the SIP calculator (assuming a yearly rate of return of 11.97% and quarterly compounding).
Investing as little as $200 a month can, if you do it consistently and invest wisely, turn into more than $150,000 in as soon as 20 years. If you keep contributing the same amount for another 20 years while generating the same average annual return on your investments, you could have more than $1.2 million.
If you start setting aside just $500 a month for retirement at age 35, the money will still accumulate significantly into your golden years. In fact, by the time you reach 65 (when retirement typically begins), you will have saved over $300,000!
Key Statistics on Average Savings Account Balances
According to the Federal Reserve's 2022 Survey of Consumer Finances (SCF), Americans' average (mean) household savings account balance is $62,410. However, the median savings account balance of $8,000 might be a more accurate representation.
A 401(k) can count as savings in a 50/30/20 budget plan. But if 401(k) contributions are automatically deducted from your paycheck, they're not included in your take-home pay calculation.
Source: NerdWallet survey conducted online March 30-April 3, 2023, by The Harris Poll among 2,035 U.S. adults. Savers say they typically set aside $985, on average, in a normal month, according to the survey. The median amount reported is $250.
Summary. Retiring with $200,000 in savings will roughly equate to $15,000 annual income across 20 years. If you choose to retire early, you will need additional savings in order to have a comfortable retirement.
Introduction: My name is Rev. Leonie Wyman, I am a colorful, tasty, splendid, fair, witty, gorgeous, splendid person who loves writing and wants to share my knowledge and understanding with you.
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