The share market is a great place to grow your wealth and build a second income. And while starting with a nice lump sum might make things easier, it isn't actually necessary. It is possible to take a slow and steady approach, investing modest amounts into your portfolio, to grow your wealth.
For example, if you were to drip feed your portfolio over a long period, you could grow those modest contributions into something substantial thanks to the power of compounding.
Compounding is when you generate returns on top of returns. It helps supercharge your portfolio, particularly the longer you leave it.
Let's take a look now at what drip feeding $200 a month into ASX shares could turn into in the future.
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Drip feeding your way to a second income with ASX shares
The market average return over the last three decades is 9.6% per annum. While we cannot guarantee this return in the future, we're going to use it as the basis of our calculation.
If you were to drip feed $200 into an ASX portfolio from today and match the market return, you would have grown your portfolio to approximately $40,000 after 10 years.
But here's where the magic of compounding starts to show. If you were to keep going a further 10 years, you wouldn't double your portfolio to $80,000, you would see it more than triple to approximately $140,000.
While this is a nice sum of money to earn a second income from, you could keep going to make it even greater.
For example, going an extra 10 years with the same return would see that $140,000 portfolio increase to approximately $385,000.
At that point, you could transition your ASX portfolio to be focused on income and sit back and watch the dividend cheques come rolling in.
Let's say you wanted to earn a $20,000 second income from ASX shares, all you would need to do is construct your $385,000 portfolio in a way that made it average a 5.2% dividend yield. Doing that would yield $20,000 in dividend payments to you each year without lifting a finger.
Overall, I believe this demonstrates that it is more than possible to generate significant wealth on modest sums if you take a long-term approach.
