Fancy getting money without having to work for it?
So do I.
Believe it or not, it is possible for the average person on the street to create a handy source of passive income.
In this article, I'll explore how you can invest in ASX shares with the aim of receiving $18,000 per year coming in.
Wouldn't that be a nice booster to your pay cheque!
Grow the investment with a portfolio of three growth stocks
National Australia Bank Ltd (ASX: NAB) research earlier this year showed the average Australian has about $34,500 in savings.
Let's say you start with that.
The first step is to grow this nest egg to a certain size when $18,000 of passive income could be extracted.
Past performance is no indicator of what will happen in the future, but as an example let's put the money equally into three ASX growth shares — Telix Pharmaceuticals Ltd (ASX: TLX), Xero Limited (ASX: XRO) and Audinate Group Ltd (ASX: AD8).
For the purposes of calculations, Xero has gained about 150% and Audinate has doubled over the past five years respectively. That equates to compound annual growth rates (CAGR) of 20.11% and 14.87%.
That makes the average CAGR 17.5%.
Telix has rocketed a phenomenal 1,400% over the past five years, but that was during a time of rapid growth in its infancy.
We'll assume the next five years will be more steady, and that it will grow at the average of the other two.
According to the government's MoneySmart calculator, a $34,500 investment with $300 each month added will grow rather quickly with a 17.5% annual return.
After just six years, it will have expanded to $135,615.
We're almost there.
How to harvest passive income
Now we have two choices with this $135,615.
One option is to keep the portfolio as is, and just sell off the 17.5% annual return each year. Theoretically that will reap you a phenomenal $23,732 of passive income.
But the catch here is that growth shares can fluctuate up and down in value according to the whims of the market and the economy.
So while on average you might receive $23,000 of passive income, some years you might not receive anything. In fact, in a bear market the portfolio could actually be smaller than the year before.
For more reliable income, it could be worthwhile to switch the nest egg to an ASX dividend stock.
Of course, dividend shares are also prone to volatility in their valuations. But if the company has a policy of paying out steady dividends, then the passive income will be more stable.
As an example here, let's say we invest this money into lenders mortgage insurance provider Helia Group Ltd (ASX: HLI).
The dividend yield currently stands at an eye-popping 15.36%.
This means that you could rake in $20,830 of passive income each year for the rest of your life.
Add to that the fact that Helia's dividends are fully franked, and the amount you receive could be even greater.
Put your feet up — your job here is done.
