There are few things that Australians enjoy more than their morning coffee.
And while I would never dare to suggest you give up your daily dose of caffeine (could you imagine how grumpy everyone would be?!), I do want to demonstrate just how forgoing a seemingly insignificant purchase such as a morning coffee could create a lifelong stream of passive income from ASX shares.
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Turning coffee into money with ASX shares
If you were to make a simple sacrifice of forgoing a daily $5 coffee on weekdays, you would accumulate approximately $100 in savings a month. That's $1,200 a year that could be channelled into ASX shares.
Now, you might think that such a modest sum wouldn't make much of a difference, but it's important to recognise the compounding magic that lies within consistent investing.
Over the last 30 years, the Australian share market has generated a total return of 9.6% per annum. There's no guarantee that it will do the same again over the next three decades, but we're going to assume it does for the purpose of this article.
After five years of consistently investing $1,200 annually and reinvesting dividends, your portfolio would have grown to around $8,000. While that isn't necessarily a game-changer, it's not a bad result for simply redirecting your daily coffee funds towards your future financial security.
Now, if we were to skip ahead to the 10-year mark, investing that $1,200 into ASX shares each year would have led to your portfolio increasing in value to approximately $20,500.
If you wanted to stop here and start enjoying your morning latte again, then you could change your focus to passive income and receive over $900 in dividends each year if you had an average dividend yield of 4.5%.
Shares such as Commonwealth Bank of Australia (ASX: CBA) and Rio Tinto Ltd (ASX: RIO) more often than not trade with such yields.
Keep going for more passive income
Investors that keep giving up their daily coffee for a further 10 years and reinvest their dividends, would see their portfolio value increase to $72,000 at the 20-year mark.
Stopping here with the same 4.5% average dividend yield would lead to a passive income of $3,200 being generated.
But why stop there? If you were to let compounding do its thing for a further decade, the benefits of your disciplined approach would really start to show. At that point, you would have amassed a portfolio valued at just over $200,000.
With a 4.5% dividend yield across your portfolio, this would yield you $9,000 in passive income each year. All for giving up a single cup of coffee each weekday.
Overall, this example illustrates the power of making small, consistent investments over time. By sacrificing a daily coffee, or simply finding $5 to put aside each weekday, and redirecting those funds into ASX shares, you can pave the way for life-long passive income and financial security.
