Investors looking to build a passive income from ASX shares don't need a fortune to get started.
In fact, by investing just $10 a day in ASX dividend shares, you can create a passive income stream of $31,750 a year.
Here's how.
Image source: Getty Images
Save to invest in ASX shares each day to earn that passive income
Now, unless you have some magic beans to sow, you're obviously not going to reach a sizeable passive income by investing $10 in ASX shares overnight.
But that's okay.
Investing is a long game.
The first step to achieving that goal is to set aside $10 a day (or $3,650 a year) towards building a diversified ASX share portfolio. It's important to choose companies operating in different industry sectors, and maybe even different countries, to reduce the risk of your entire portfolio taking a hit if one sector faces a downturn.
And, while not a hard rule, it's worth paying extra attention to stocks with long track records of regularly paying fully franked dividends. That could see you holding onto more of your passive income at tax time.
To avoid brokerage fees from eating into your passive income, it's also a good idea to save enough to invest in larger allotments. Say $1,000 worth of ASX shares at a time.
And time is an important element here.
The magic of compounding
By holding onto your well-performing ASX shares and, importantly, reinvesting the dividends, you'll have the miracle of compound interest working for you to help grow that passive income.
Here's what I mean.
Over the past three years, the S&P/ASX 200 Index (ASX: XJO) is up 25%.
Not bad.
But over that same period, the S&P/ASX 200 Gross Total Return Index (ASX: XJT), which includes all cash dividends reinvested on the ex-dividend date, has returned 40%.
Or an average of 13.3% a year.
Much better.
But we'll play it more conservatively, as we'll factor in a bit of post-pandemic rebound in those gains.
Instead, we'll assume an average forecast gain of 8.5% a year.
At that return, investing $10 a day will see your ASX share portfolio grow to $453,395 in 30 years.
Now it may be time to stop reinvesting those dividends and start enjoying that passive income.
By pulling out those dividends, we'll assume our returns dip to 7% a year.
Which is fine.
You can then let those ASX dividend shares ride and enjoy a passive income of $31,750 a year.
So, what are you waiting for?
