Do you have $20,000 that you could invest?
A survey by online comparison service Finder earlier this year found the average Australian has $40,000 saved up in the bank.
So a fair few of you who are reading this should have $20k you could put away for a better future.
What does a better future look like?
How about a nice flow of passive income? That is, money coming in for no work.
It could supplement your day job to elevate your standard of living. Maybe an overseas holiday each year that you couldn't otherwise afford.
If the passive income is large enough it could even allow you to quit your day job.
Wouldn't that be nice!
It's not a crazy dream to make this happen starting with an ASX stock portfolio of $20,000.
Check out this hypothetical:
Save regularly and grow the portfolio
The $20,000 starter portfolio needs to grow to a certain size before it can produce reliable passive income.
There are many paths to this, but the one I personally favour is to buy a diversified set of ASX growth shares.
A couple of examples that experts are liking at the moment are Life360 Inc (ASX: 360) and RPMGlobal Holdings Ltd (ASX: RUL).
While past performance never predicts the future, their track record can tell us something about what shares can do.
Family software maker Life360 issued its shares for $4.79 at its initial public offering (IPO), which works out to be a 62% growth since its float in May 2019.
That much gain over 4.5 years equates to a compound annual growth rate (CAGR) of 11.3%.
Meanwhile the RPMGlobal share price has risen a tidy 154% over the past five years, which gives it a CAGR of 20.5%.
Of course, not every stock in your portfolio will perform as well as RPMGlobal.
But if you can maintain an average of 12% CAGR and add $800 to it each month, you will have a substantial amount of ASX shares in a few years.
For example, after six years the portfolio will be $117,382. After 12 years, the pot will be $309,597.
The stocks will be worth more than $533,000 if you can wait until the end of year 16.
How to start the magical passive income
So how do you squeeze passive income out after growing the portfolio?
You can either sell off the capital gains each year, or sell all your growth stocks to reconstruct a portfolio full of ASX dividend shares.
Let's say the existing portfolio can maintain a CAGR of 10%, or that the new dividend stocks can output 10% of dividend yield each year with the help of franking.
That means that the amount of passive income you receive will simply depend on how patient you were.
If you let the original stock brew for six years, you'll rake in $11,738 of annual passive income from then on. If you can resist the temptation until after 12 years, an amazing $30,959 could be coming into your bank account each year.
Those who have the discipline to allow the nest egg to expand a full 16 years, you will be the beneficiary of a handsome $53,300 of annual passive income.
Not bad, huh? You could retire on that.
