Investing in ASX shares can be a great way to build passive income through dividends, distributions, franking credits and the fact that businesses can deliver compounding growth.
One of the best things about investing in ASX shares is that we can start with a relatively small amount of money, whether someone is aged 18 or 60. Many online brokers have a minimum investment amount of just $500. It can take tens of thousands of dollars for a deposit to buy a property.
It doesn't take that long for small amounts to grow into much larger amounts, and we don't need to use any debt to do it, either.
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My passive income goal
I like the idea of building up my passive income enough so that it covers all the expenses my household would want to (frugally) spend, even if we weren't bringing in any dollars from working.
I'm not exactly sure what the actual expenditure will look like in the future, particularly with how inflation may develop, so for now, the annual passive income goal is $40,000.
That target may need to rise to $50,000 or $60,000, but at the start of the goal, it was $40,000. I have a long way to go, but I've made good progress.
I regularly write about the ASX shares in my portfolio. I'm targeting businesses that pay dividends, and I'm trying to find ones that can grow their dividends organically over time (though that's not guaranteed).
Some of the ASX dividend shares I'm invested in include Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Brickworks Limited (ASX: BKW), Duxton Water Ltd (ASX: D2O), Bailador Technology Investments Ltd (ASX: BTI) and Altium Limited (ASX: ALU).
How I'm building towards the $40,000 goal
I don't know what future dividend yields will be, but I think a reasonable (grossed-up) yield to target is 4% when I'm looking at ASX dividend shares.
With a 4% yield and a goal of $40,000, that translates into a required portfolio value of $1 million.
Everyone's finances are different, so I'll run through a few different scenarios with a compound calculator showing how someone could build towards that total as if they were starting at $0.
Over the ultra-long term, the ASX share market has delivered an average return per annum of around 10%, so that's going to be the number I use – it could be worse or better than that.
Starting at $0, investing $500 a month turns into $1 million in around 29 years.
Investing $1,000 a month grows into $1 million in less than 23 years.
If we invested $2,000 per month then this would reach $1 million in less than 17 years.
Investing $3,000 a month would reach $1 million in less than 14 years.
Of course, we won't necessarily invest the exact same amount every month, but we can think of it as just an average over a year.
Foolish takeaway
I'm hopeful that I can reach the passive income target number in my 40s (I'm currently in my early 30s), but time will tell whether I'm successful or not.
There are plenty of compelling ASX dividend shares that could help with an investment income goal, not just the ones I mentioned were in my portfolio.
