If you have $7,500 in your savings account and no plans for it, then it could be worth putting it to work in the share market.
Especially given how it is possible to turn that money into significant passive income in the future.
Generating passive income
History shows that by making long-term investments into ASX shares, it is possible to grow your wealth meaningfully.
This is thanks to the power of compounding, which is when you earn returns on top of returns. This process supercharges your investments, helping them to grow from something modest into something material.
Historically, a return of 10% per annum has been achievable with ASX shares. If this were to remain the case in the future, then let's see what sort of passive income we could generate.
Starting with $7,500
Without making any further investments, our $7,500 would turn into almost $20,000 in 10 years. And while we could start earning passive income from this, if we keep going, our income potential will be greater.
For example, another 10 years would turn these savings into approximately $50,000 and a further 10 years would see it become $130,000. At that point, earning a 5% dividend yield from our portfolio would lead to a passive income of $6,500 per year.
But what if we contributed a little more?
Compounding really comes to life if you make additional contributions.
For example, if you were to add an extra $2,000 a year to your investments, you would see a huge difference in your portfolio value, ceteris paribus.
After 10 years you would have approximately $55,000, after 20 years you would have $175,000, and after 30 years you would have almost $500,000.
Generating a 5% dividend yield on the latter would mean a passive income of $25,000. And if you divide that up into monthly instalments, you're looking at a monthly income boost of over $2,000.
The even better news is that if your investments continue to grow, then your income will grow along with them. This would mean a larger and larger income stream in the future without lifting a finger.
All in all, I believe this demonstrates why playing the long game can be a game changer for income investors.
