$20k of savings? Here's how I'd aim to turn that into a second income of $6,705 a month!

The bank account doesn't have to be huge for you to start investing for a better future.

| More on:
Smiling woman with her head and arm on a desk holding $100 notes out, symbolising dividends.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

You don't need a massive amount of cash to kick off an investment that could pay out a perpetual second income.

Don't believe me?

Let's start with $20,000 and take it through this hypothetical:

Save, save, save, invest, invest, invest

Say you constructed a well diversified portfolio of ASX shares with that $20,000.

Then you saved hard and managed to add $400 to it each month.

If that portfolio can manage a compound annual growth rate (CAGR) of 13%, then you'll be raking in that second income in a matter of years.

Is 13% achievable?

I don't see why not. 

If you listen to sensible advice and pick quality stocks like Johns Lyng Group Ltd (ASX: JLG) and Dicker Data Ltd (ASX: DDR), you'll have done most of the hard work.

Over the past five years, Johns Lyng shares have returned a CAGR of 43%, while Dicker has brought in 30% per annum. The latter is paying out a 3.9% fully franked dividend yield on top of that.

These types of champions mixed with some lukewarm picks and the obligatory duds could very well provide you an overall 13% return each year.

Now sit back as the second income rolls in

Going back to the $20,000 portfolio with $400 added monthly, if that grows at 13% per annum then it will be worth $156,306 after just 10 years.

At that point, if you decide to stop reinvesting the returns and cash it in each year, you will receive an annual second income of $20,319.

That is an average of $1,693 each month for the rest of your life.

Now, if you are still young and you have patience, perhaps you want to let that stock portfolio grow for 20 years before squeezing passive income out of it?

Twenty years of growth will turn the pot into $619,006, which equates to a massive annual second income of $80,470.

In monthly terms, that's an amazing $6,705.

Enough to retire on, right?

Perhaps then it won't be a second income, but your first.

Good luck with your investments.

Motley Fool contributor Tony Yoo has positions in Johns Lyng Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Dicker Data and Johns Lyng Group. The Motley Fool Australia has positions in and has recommended Dicker Data. The Motley Fool Australia has recommended Johns Lyng Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Opinions

A woman has a thoughtful look on her face as she studies a fan of Australian 20 dollar bills she is holding on one hand while he rest her other hand on her chin in thought.
Dividend Investing

Is Telstra stock a smart buy right now for dividends?

Would I buy Telstra shares for that hefty dividend yield today?

Read more »


1 top ASX growth stock to buy that's down 40%

Here’s why I think this stock could fly higher.

Read more »

Three hikers lift their arms in jubilation as they reach a rocky peak overlooking a sensational view of water and mountains with a blue sky surrounding them.

3 ASX shares to buy for great portfolio diversification

I like what these ASX shares have to offer.

Read more »

A graphic featuring renewable energy sources such as wind, solar and battery power, indicating positive share prices growth in the ASX renewable sector

Why I'm eyeing this ASX energy share to double my money

Owning a stake in another fast-growing company could be transformative.

Read more »

The Two little girls smiling upside down on a bed.

2 exciting ASX small-cap stocks that could grow significantly

International growth is very compelling for these stocks.

Read more »

A young woman wearing a blue and white striped t-shirt blows air from her cheeks and looks up and to the side in a sign of disappointment after the ASX shares she owns went down today

Seeing red? The ASX All Ord shares I'd buy on a down day

With the markets taking a turn for a worse, here are the stocks I'm eyeing.

Read more »

A young office worker is surrounded by peers who are clapping and congratulating her.

3 reasons I think this fantastic ASX ETF is a top buy

Quality is just one factor that makes this ETF is a great pick, in my opinion.

Read more »

Yellow rising arrow on a brick wall with a man on a ladder.

How has this ASX 200 stock returned 14% per annum over the past five years?

How has this stock beaten the pants off the market since 2019?

Read more »