£2k in savings? Here’s how an investor can use it to build a second income of £24,126 a year

Building a sustainable and growing second income through investing doesn’t require extraordinary skills or insider knowledge. Private investors have one powerful ally: time. In a long-term approach, even a small amount can grow into a significant income stream.

Here’s how an investor can get started with as little as £2,000 (or less).

Bind the strength of FTSE 100 stocks

I FTSE 100 Indexing is a great source of income. Over time, investing in a diverse selection of UK blue-chip shares can build wealth through a combination of dividends and share price growth.

Although the UK’s largest companies can be volatile in the short term, history shows that shares outperform most asset classes over time. A well-constructed portfolio of 15-20 FTSE 100 stocks is a good start. Targeting reliable, stable companies with strong customer bases and consistent profit growth is important.

These companies are often better equipped to deal with economic turmoil while rewarding shareholders with a regular payout.

Tobacco maker Imperial Brands (LSE: IMB) is a good example for investors to consider. Despite the controversy surrounding tobacco, and the ongoing challenges of regulation, it has shown the ability to adapt and adapt to life. The board has worked hard to build strong brands, maintain market share and transition to next-generation products such as vaporizers and vaporizers.

Investors tend to like Imperial Brands for its reliable income stream. Today, the next yield is 5.8%. That’s above the FTSE 100 average of 3.5%. Not guaranteed though. There is no dividend.

Lately, Imperial Brands’ share price has also been rising. It’s up 38% over the past year.

Stocks are on fire!

After a strong run, there is a good chance that stocks will do nothing. There are long-term threats. A vaping clampdown could wreak havoc, while smoking rates may continue to decline. However Imperial Brand has shown durability bags over the years. I personally don’t buy tobacco stocks but for those investors who do, I think they might want to consider this for an excellent source of profits and possibly dividend growth.

Long-term investing is all about patience and leveraging the power of compounding. Over the past 20 years, the FTSE 100 has delivered an average annual return of 6.9%, including reinvested dividends.

Let’s say an investor puts away £2,000 at age 25 and leaves it in the market for 40 years. At that rate of return, their investment will grow to £28,850 by age 65. A yield of 5.8% will provide a secondary income of £1,673 per annum. Not bad from a £2k investment.

Investing is not a one-time process. Let’s say the same investor invested £2,000 every year for 40 years, under the same growth assumptions. Their portfolio will grow to £415,973 over 65 years. Withdrawing 5.8% per annum would produce £24,126 in annual income. That’s a pretty good return, although inflation will have eroded its spending power in real terms.

While the stock market offers compelling growth potential, no investment is without risk. Market returns may fall short of these expectations, and individual companies may face challenges. Diversification is important to reduce the impact of any one underperforming stock.

Although £2,000 a year is a solid sum, with gradual growth over time our investor can generate even more impressive rewards.