Building a passive income from ASX shares is something that anyone can do.
And while it doesn't happen overnight, if you're both disciplined and patient, generating a $20,000 second income from ASX shares is very achievable, even by making modest investments, thanks to compounding.
Getting started
Firstly, in order to get a $20,000 a year paycheck from the share market, you're going to have to build your portfolio to a size that yields this amount in dividends.
Given that many banks like Westpac Banking Corp (ASX: WBC) and high-yield ASX ETFs offer 6% yields for investors, we'll base our calculations on that.
To be paid $20,000 of dividends each year when earning a 6% dividend yield, you'll need a portfolio of ASX shares valued at approximately $330,000.
When you're starting out, that might seem like an unattainable goal, but I don't believe it is. Once again, it's all about patience and discipline.
Over the long term, share markets have provided investors with an average annual return of 10%. Unfortunately, I cannot guarantee that this will be the case in the future, but I would be disappointed if future share market returns are not in line with historical levels.
If you're able to invest $300 a month into high-quality ASX shares and generate a 10% average annual return, your portfolio will have grown to be worth $335,000 in 24 years.
At that point, you could switch your focus to income and build a diversified portfolio filled with ASX shares offering dividend yields averaging 6%. Doing so would give you a $20,000 second income without having to lift a finger.
Speedier options
Investors who are able to put a little bit extra into their monthly investments will get there even quicker.
For example, investing $500 would grow your portfolio to the required size after a little over 19 years.
Can stretch your budget further? Well, $750 would take a touch over 15 years to hit our goal.
Which ASX shares should you buy?
I would focus on buying ASX shares with strong business models, excellent management teams, competitive advantages, and positive growth outlooks.
Companies such as CSL Limited (ASX: CSL), Domino's Pizza Enterprises Ltd (ASX: DMP), and Goodman Group (ASX: GMG) tick a lot of these boxes for me.
Alternatively, you could take the easy option and buy index-tracking ETFs like Betashares Nasdaq 100 ETF (ASX: NDQ) or Vanguard Australian Shares Index ETF (ASX: VAS). These funds aim to provide you with the return of the respective index before fees.
