The power of compounding can help turn just $5 a day into enough passive income for life.
Investors don't need a lot of money to get started with investing in ASX shares. Many brokers allow investors to start with just a $500 investment. It can take tens of thousands of dollars to invest in property.
However, I love that it's easy to take a backseat with ASX shares. We don't need to worry about tenants or getting a toilet fixed.
If we can put aside $5 a day, then that's $1,825 per year. That's not going to make someone a millionaire in 12 months. But, long-term growth can make a massive difference.
The power of compounding
Using the excellent compound interest calculator from Moneysmart, we can calculate that saving $5 a day for the portfolio for 40 years at an average return per annum of 10% would turn into $808,000.
A 5% dividend yield for that portfolio would make an annual passive income of $40,400.
But, I think there are a few ways that we can try to deliver returns of stronger than 10% per annum.
How to invest for passive income
One way could be to go for ASX dividend shares that could deliver good total returns over the long term so investors can receive passive income whilst the business builds. But, re-investing the dividend can enable even stronger compounding.
For example, Wesfarmers Ltd (ASX: WES) and Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) have both delivered solid long-term returns for decades.
In the recent FY23 half-year result, Soul Pattinson said that its total shareholder return was an average of 12.3% per annum. But remember, past performance is not a reliable indicator of future returns. If the $5 per day compounded at 12% per year over 40 years, it would grow to $1.4 million. A 5% dividend yield would make an annual passive income of $70,000. Or, we could live off the dividend income sooner than 40 years.
But, another tactic for building dividend income could be to try to find the ASX shares that could deliver a large amount of capital growth and then investors could sell those shares and then buy ASX dividend shares to deliver the passive income.
My crystal ball isn't working at the moment, so it can't tell me which ASX shares could deliver the most capital growth. I think globally expanding businesses could deliver a lot of growth like Lovisa Holdings Ltd (ASX: LOV), Frontier Digital Ventures Ltd (ASX: FDV) and Volpara Health Technologies Ltd (ASX: VHT).
But, as a diversified option, I'd choose Vaneck Morningstar Wide Moat ETF (ASX: MOAT) to try to deliver long-term compounding outperformance.
However investors choose to do it, I think that investing in ASX shares is the best way to deliver long-term growth and unlock passive income.
Of course, putting more money into ASX shares could unlock a lot more dividend income. Saving $10 per day or $20 per day could dramatically reduce how long it takes to deliver life-changing passive income. Investing in the right ASX shares can also make a big difference to the portfolio size after a number of years.
