So you've done the hard bit — you've spent less than you earned and managed to grow your savings into a $50,000 pot.
Now what do you do with this nest egg?
If you're seeking passive income, the $50,000 can become a self-sufficient machine that will pay you $10,000 each year for doing exactly nothing.
Let's examine how one can achieve this in two steps:
1. Crank up the capital
First, we need to grow the $50,000 pot.
Obviously investing this into one particularly well performing stock will grow it rapidly.
But instead of assuming that you're a genius stock picker, let's simulate a diversified portfolio of shares by picking an ETF to buy into.
The example I'll use is Vaneck Morningstar Wide Moat Etf (ASX: MOAT).
The fund invests in a variety of US companies that are judged to have wide moats — i.e. a significant competitive advantage.
While past performance is no indicator of what will happen in the future, I like that it hasn't been massively volatile over the past five years while doubling the share price.
Anyway, doubling every five years is the equivalent of a 14.87% return each year.
If we invest the $50,000 into the Vaneck ETF — or your own handpicked portfolio that performs just as well — you will have grown it into $189,000 after nine years.
Alternatively, If you can keep saving and add just $200 each and every month, then after just seven years the nest egg will have expanded to $169,958.
Nice work. First step complete.
2. Rake in the dividends
Now, if we can flip that $169,958 into a dividend-producing machine, then we have a chance at raking in $10,000 of passive income each year.
There are plenty of ASX dividend shares that you could put this into, such as with this example with BHP Group Ltd (ASX: BHP), which is currently paying a massive 8.7% yield.
But, once again, let's assume you're not a stock picking guru.
Let's say you buy a diversified portfolio of dividend stocks to spread the risk that performs similarly to the Vanguard Australian Shares High Yield Etf (ASX: VHY). Or you just buy shares in that fund.
That ETF provides a dividend yield of 6.1%, which is very much achievable.
Each year, your $169,958 pot will now pay you $10,367.
That's $10,000 in your hand every year, for no work, for the rest of your life.
