Many readers will no doubt have come up with some New Year's resolutions this week.
While most resolutions don't last beyond January, if your resolution is to generate passive income in the future, it certainly could pay to keep this one alive.
If this were my resolution, here's how I would go about fulfilling it with ASX dividend shares.
Generating passive income from ASX dividend shares
The first thing to acknowledge is that generating passive income takes time. If it were quick, everyone would just give up their day jobs and live off the income.
But that doesn't mean that one day you won't be able to do this. With a combination of time, patience, and capital, you could let your money do all the work for you in the future.
But before then, you have to start somewhere. So, let's start with a manageable $150-a-month investment into ASX dividend shares.
While future returns are not guaranteed, the share market has historically generated a return in the region of 10% per annum on average. So, we will assume it does the same in the future.
By putting $150 into the share market and earning a 10% average return each year, in a decade you would have a portfolio valued at $30,000. At this point, averaging a 5% dividend yield across your portfolio would generate $1,500 of passive income.
While this is great, it's not enough to give up work.
But if you keep going, leave your money in the portfolio, and let compounding do its thing, you will see your portfolio grow meaningfully in value.
For example, after a further 10 years, you would have a portfolio valued at approximately $110,000 if all else remains equal. This would yield $5,500 in dividend income with a 5% yield.
Fast forward another 10 years and your portfolio would grow to be worth approximately $312,000. A 5% dividend yield on this portfolio would generate $15,600 of passive income.
It is at this point when compounding really shows its stuff. If you're able to go another 10 years, your portfolio would have a market value of approximately $840,000.
With an average 5% dividend yield across this portfolio, you would be pulling in $42,000 in passive income each year (and growing).
Getting there sooner
If you're able to invest more each month, then you could reach your goal quicker.
For example, an investment of $500 a month would hit $840,000 in under 28 years, whereas $1,000 a month would get there in a touch over 21 years.
The key to fulfilling this resolution is to come up with a plan and stick with it through thick and thin. Future you will be very grateful.
