There are a lot of options out there for readers that are wanting to generate passive income.
But when it comes to generating true passive income, the kind that is both sizeable and reliable, there's simply no substitute for the power of compounding.
With compounding, you're not just aiming to see growth today or tomorrow, or even a few years down the road. Rather, you're looking at the bigger picture, with an eye towards where your investments might take you over the course of several decades.
The good news is that there are plenty of ASX shares that provide investors with regular income and have bright long-term growth prospects.
By investing a relatively modest $6,000 across these types of shares, investors could be generating decent income in time.
Income from ASX shares
Firstly, when it comes to which ASX shares to buy, you might want to channel your inner-Warren Buffett.
He looks for companies with fair valuations, strong business models, and competitive advantages. And given his investment track record at Berkshire Hathaway (NYSE: BRK.B), it would be hard to argue against this approach.
Once you have built your $6,000 ASX share investment portfolio, you can sit tight and let the magic of compounding do its thing.
Over the last 30 years, the Australian share market has generated an average annual return of 9.6%. And while there's no guarantee that it will do the same in the future, we're going to assume that it does for this exercise.
If your portfolio generated this return, in 15 years it would have grown to be worth approximately $24,000. That's without lifting a finger or adding any extra funds.
Once you have reached that figure, if you can rebalance your portfolio so that it has a collection of dividend shares that average 5% yields, you will be earning $1,200 of passive income each year. This is enough to give you a monthly pay check of $100.
Want more?
If you want even more passive income, you have the option of adding to your portfolio each year.
Here's a quick summary of how different annual contributions would impact the value of your portfolio at year 15:
- $1,000 a year = $57,500 and $2,900 of passive income
- $2,000 a year = $91,200 and $4,600 of passive income
- $3,000 a year = $125,000 and $6,250 of passive income
- $5,000 a year = $192,000 and $9,600 of passive income
As you can see, making annual contributions brings compounding to life and can give your portfolio (and passive income) a huge boost. Food for thought!
