We'd all love a strong stream of secondary, passive income to supplement our day jobs, and maybe replace them one day. What could be better than seeing passive income coming into your bank account without you having to work or it? But sadly, getting there isn't quite as easy as imagining yourself swinging in a beach-side hammock.
The good news is that ASX shares give us a great way of building a strong and reliable stream of passive income here in 2023.
But just how much would investing $300 a month into ASX shares get us in terms of secondary income?
Using ASX shares to build a second income
Well, that depends on two factors: how long you invest for, and what kind of rate of return you can enjoy.
I think using passive exchange-traded funds (ETFs) on the ASX is a great way to gain passive income. Especially for those of us who don't enjoy sifting through annual reports and income statements, and doing the whole 'stock picker' thing.
Instead of comparing the revenues and profits of Coles Group Ltd (ASX: COL) against Woolworths Group Ltd (ASX: WOW), you can just buy an ASX 200 ETF and buy up the whole lot. An ASX 200 ETF tracks the ASX 200 index, which in itself represents the largest 200 companies listed on the Australian share market.
That means you can own a piece of all 200 of those shares just by owning this one fund. That's everything from Commonwealth Bank of Australia (ASX: CBA) and Telstra Group Ltd (ASX: TLS) to Harvey Norman Holdings Limited (ASX: HVN) and Nine Entertainment Co Holdings Ltd (ASX: NEC). And Coles and Woolies, of course.
As such, an ASX 200 ETF is a perfect bottom-drawer investment that you can habitually add money to over a long period of time, with the confidence that you will achieve the broad return of the entire Australian stock market. Plus, these sorts of funds tend to pay out generous passive income in the form of dividends. You'll get franking credits as well, which can further boost your wealth.
No one knows what the future holds in terms of returns. But one ASX 200 ETF, the SPDR S&P/ASX 200 Fund (ASX: STW), has averaged a return of 7.88% per annum since 2001. 4.68% of that 7.88% comes from passive dividend income.
How much passive income can $300 a week get you?
So let's assume an investor puts $300 a week into this ETF and reinvests their passive income back into the fund. After ten years (assuming that same rate of return), you would have a total sum of $55,176. Using that, you could draw on this nest egg to generate a passive income of just over $215 a month. See already, we are getting close to what you've been investing every month back in passive income thanks to compounding.
But let's say that our investor starts putting away $300 a week when they are 20 and takes stock after 25 years when they are 45 years old after reinvesting their dividends that whole time. Well, then you'd have a lump sum worth a whopping $281,944, which could be capable of generating around $1,100 per month in passive income.
Add another ten years onto that, and our pile would have swelled to $672,915, spinning off $2,624 every month in secondary income. Now you're well on your way to a very happy and comfortable retirement indeed. All by investing $300 a month into a single ASX ETF.
Of course, this is all hypothetical. An ASX 200 ETF like STW might not generate that same 7.88% return per annum over the next 20 years as it has for the past 20. It could be even higher, or lower, for all we know.
But what we do know is that investing in shares has always been one of the best and most reliable ways of generating passive income. All you need is patience and discipline.
