It is always advisable to have some cash in reserves for a rainy day. However, having excess cash is a different story in the current environment with high inflation and most big banks not passing on the higher interest rates on normal cash accounts.
That's because inflation is eroding the real value of this cash. For example, $100 in a savings account earning 3% interest will be worth $103 in a year.
However, with inflation at 7%, you would need to grow that $100 to $107 in order to have the same purchasing power as you do today.
In light of this, it could be a good idea to put your excess cash to work in the share market with ASX shares instead of letting inflation erode its value.
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Turning your excess cash into passive income
With the above in mind, let's take a look to see how we could go about putting $10,000 of excess savings to work.
If passive income is the goal, then it would make sense to look at dividend-paying ASX shares.
By building an income portfolio of high-quality ASX dividend shares with solid growth potential, investors could create a growing stream of income over the years.
For example, if you were to put $10,000 into a group of ASX dividend shares offering 4% yields, you would earn $400 of income in year one.
If these shares were then able to grow their dividends by 7.5% per annum for 10 years, your income would grow accordingly. This would mean after 10 years, you would have approximately $825 of annual passive income from your portfolio.
And if we keep going and let compounding work its magic, your portfolio would be yielding $1,700 of annual passive income annually after 10 more years if it continued to grow at this rate.
One more year of investing and your passive income would have reached approximately $1,830 annually, ceteris paribus, which is the equivalent of $150 a month.
Another thing to consider is adding any further excess cash to your portfolio each year. Doing so would accelerate your returns and the passive income generated from your portfolio.
