Am I silly to suggest it’s a good idea to put £10 a week towards generating a second income when economic times are so tough?
Maybe. But I know that one of the most important factors driving long-term wealth creation is consistency.
Many individuals have quietly built their personal fortunes by disciplining themselves to put money away on a regular basis. Every month works well for me. And £10 a week works out at just over £43 a month. Is that too much to ask of ourselves to begin with?
Overcoming the corrosive effects of inflation
Maybe, maybe not. But finding the spare cash to invest for possibility of a better financial future is just the beginning. The next step is to make the money work hard.
And one strategy could involve putting the funds into interest-paying cash accounts. That used to be a terrible idea when interest rates were less than 1%. But things have improved. And in a recent search, I turned up several accounts paying just above 4% annually for deposits as low as just £1.
Cash savings are important. It’s a good idea to keep at least some cash available for immediate needs and emergencies – such as replacing a washed-out washing machine.
And with bank accounts paying decent interest again, the money can compound in value. In other words, interest earned will land in the account and earn interest itself. That’s a kind of virtuous upward spiral that can accelerate over time. And the principle of compounding is key to building long-term wealth.
However, banks almost always set the interest rates they pay on cash accounts below the rate of inflation. And that means even though the balance in the account is compounding in value over time, the spending power of the money will not keep up.
Inflation tends to eat the real value of cash savings. So saving cash will not likely work as a wealth-building scheme over the long run.
But I’d aim to overcome the corrosive effects of inflation by investing money into the stock market.
The best-performing asset class
Over the long haul, stocks and shares have earned a reputation for outperforming all other major classes of assets, such as property, bonds and cash. And that nugget of information is vital to my plan for wealth-generation.
The main factor I’d aim to use in my investment programme would be the outperformance of equities (stocks and shares) over the long term. And that means it’s vital to invest with a long-term perspective. So I’d hold on to investments through the shorter-term ups and downs of the stock market.
The shareholder dividends paid by share funds and individual company stocks can provide decent, long-term income. But to begin with, my portfolio would be in the building stage.
So I’d reinvest all the dividend income along the way with the aim of maximising the benefits of the compounding process. The aim would be to take a larger second income later, perhaps in retirement.
Stocks and shares carry more risks than cash savings. But I’d embrace those risks in the pursuit of better long-term returns. And I’d aim to mitigate some of the risks by diversifying between different funds and shares.
The post A lifelong second income for £10 a week? Here’s how I’d achieve it appeared first on The Motley Fool UK.
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Kevin Godbold 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.
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