$7,000 of savings? Here's how I'd aim to turn that into passive income of $350 a month!

Here's how you could generate a significant source of passive income with ASX shares.

| More on:
Smiling woman with her head and arm on a desk holding $100 notes out, symbolising dividends.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A great way to earn passive income is by investing in dividend-paying blue-chip ASX shares with a long-term approach. By doing this, it could be possible to build sizeable ongoing income streams.

With that in mind, if I had a spare $7,000 sitting in a savings account, here is how I would go about trying to turn it into a passive income of $350 each month.

Turning $7,000 into $350 of monthly passive income

Firstly, $350 of passive income each month is the equivalent of pulling in $4,200 per year in dividends.

Given that a 5% dividend yield is easily achievable with ASX shares, we're going to base our calculations around that. This means we're going to have to build our $7,000 investment into $84,000 if we want to generate the desired amount of income.

While going from $7,000 to $84,000 might seem like an impossible task, history shows that it isn't.

For example, over the last 30 years, the Australian share market has generated an average total return of 9.6% per annum. This would have turned a single $7,000 investment into approximately $110,000.

While there is no guarantee the market will generate the same level of return in the future, if it were to do so, it would take just over 27 years to reach our target destination.

At that point, we can adjust our portfolio to ensure it has an average dividend yield of 5%, and then sit back and watch the passive income flow in.

We could also get there quicker if we are willing to put in a little more capital each year.

For example, starting with a $7,000 investment and adding $2,000 each year to our portfolio would almost halve the time it takes to hit our target to 14 years.

The key is coming up with a plan and then sticking with it whatever is happening in the market.

But which ASX shares should you buy?

When thinking long term, we want to buy quality companies with strong business models and, ideally, sustainable competitive advantages. And if they pay dividends, it may be best to reinvest them until we need them as passive income. This allows us to benefit from compounding.

There are plenty of blue-chip ASX shares that tick these boxes, a couple of which appear to be on sale at present.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on How to invest

Men standing together and defending the goal post symbolising defensive shares.
How to invest

Is your ASX share portfolio 'positioned too defensively'?

Being too defensive can cost you in the long run...

Read more »

A young cool man sits in a private jet wearing headphones and casual clothing.
How to invest

My ASX tips: How to become an Aussie millionaire

Stocks can be the ticket to wealth.

Read more »

a man sits on a ridge high above a large city full of high rise buildings as though he is thinking, contemplating the vista below.
How to invest

Why I just sold my biggest ASX stock holding

It's not always about money and the best returns. You need to be able to live with your investment decisions.

Read more »

A young man goes over his finances and investment portfolio at home.
How to invest

How to exploit the ASX's current weakness for long-term gain

Market weakness doesn't need to be the enemy. It can be your best friend.

Read more »

a man in a business suit sits happily leaning back into his hands behind his head with his feet on his desk and smiles broadly.
How to invest

2 things I'm doing to prepare for a 2024 stock market crash

Will the market crash in 2024? Here's why it doesn't matter to me.

Read more »

a smiling picture of legendary US investment guru Warren Buffett.
How to invest

No savings at 40? I'd use the Warren Buffett method to build wealth with ASX shares

Following Buffett's lead could make you a millionaire in the future.

Read more »

Man holding out Australian dollar notes, symbolising dividends.
How to invest

I'd drip feed $200 a month into an ASX share portfolio to target a $20,000 second income

Compounding helps supercharge your portfolio, particularly the longer you leave it.

Read more »

A couple sitting in their living room and checking their finances.
How to invest

If you sold your investment property and bought ASX shares, would you make more money in dividends than rent?

Transitioning between these two asset classes will create a loss of investment capital. Does this matter?

Read more »