Why do you invest in ASX shares?
For many Australians, their end goal is to receive an income without working.
It's not such a crazy dream, though. It's very realistic, in fact.
For those who have managed to save up $50,000 so far, let's explore how one could convert that to $2,000 of passive income each month.
Grow the fruit first
Firstly, we can't extract $24,000 of income per year from just a $50,000 pot.
So let's grow the nest egg.
There are a whole bunch of ASX growth shares out there that could expand your capital. You could pick some yourself, buy an exchange-traded fund (ETF), or seek advice from paid services like The Motley Fool.
While remembering that the past is no indicator of future performance, I'll use three of my favourites for this example: AVITA Medical Inc (ASX: AVH), Johns Lyng Group Ltd (ASX: JLG) and RPMGlobal Holdings Ltd (ASX: RUL).
This is a well-diversified mini-portfolio. We have one player each from biotechnology, insurance construction and mining services.
All three stocks have grown admirably over the past five years, despite that period encompassing major dips like the COVID-19 crash and the 2022 growth correction.
The Johns Lyng share price has rocketed 333% over that time, Avita Medical shot up 253%, and RPMGlobal now trades 169% higher.
Let's be conservative and assume this portfolio will return the lowest of those rates, which equates to a 21.89% compound annual growth rate (CAGR).
If you bought into these stocks with your $50,000, it would have grown to $243,620 after just eight years.
Now let's go get that passive income.
Then get the juice out
You now have a couple of choices with your $243,620 portfolio.
You could sell out of the growth stocks and buy into ASX dividend shares for a reliable stream of income.
An example of such a portfolio might contain HomeCo Daily Needs REIT (ASX: HDN), Helia Group Ltd (ASX: HLI) and Woodside Energy Group Ltd (ASX: WDS).
Again, this has decent diversification with real estate, insurance and energy sectors represented.
Woodside is currently paying out a handsome 9.9% dividend yield fully franked. HomeCo Daily Needs provides 7.2%, while Helia is handing out a whopping 14.2%.
Just raking in the median of those three would bring in the $24,000 of annual passive income that we're looking for. That is, $2,000 each month in your hand.
However, the downside with this approach is that selling out of the growth portfolio could trigger capital gains taxes, depending on your personal circumstances.
So if that worries you, you could simply leave the money in the previous portfolio.
Then each year, you sell off the gains and keep the proceeds as passive income.
The disadvantage of this strategy is that the income won't be as reliable and consistent. It's just the nature of ASX shares that gains aren't seen in a neat linear line over the years.
However, the passive income could potentially beat the dividend stocks.
We previously assumed a CAGR of 21.89%. If this can be maintained, you're looking at an average of $53,328 of passive income annually.
Yes, more than $50,000 in your pocket — without working.
