I'd love to receive $30,000 of annual passive income, but right now, I'm only getting a fraction of that. I hope to get there in the future!
So how quickly could I reach that target?
It'd be easy if I won the lottery or inherited $1 million. Then I'd just need to invest in a portfolio of ASX shares with an average dividend yield of 3%.
Every household has a different financial setup, so regularly putting money into the stock market will depend on individual situations. Investing $1,000 per month seems like a nice round target, so I'm going to use that as an example to get us to $1 million.
The share market has returned an average of roughly 10% per annum over the long term. Future returns could be stronger or weaker than that, particularly in the short term.
In 24 years, the total value could grow to $1.06 million. With a 3% dividend yield, that's actually $31,800 of annual passive income. If a 20-year-old could reach that by age 44, they'd be sitting very nicely (financially)!
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Do I need to wait 24 years to get $30,000 of annual passive income?
There are a few key ways to build up that cash flow faster.
First, by investing more. In my example, we talked about $1,000 per month. Maybe you can only invest $1,000 per month in the first year, but then circumstances change, and you can invest $2,000 per month. It would take less than 18 years if $2,000 were invested per month.
The second option is to choose investments that could deliver stronger growth. I regularly write about ASX shares I think are capable of producing returns that could beat the market.
FiThe third option is to choose investments with a higher dividend yield. I've assumed the dividend yield for the portfolio will be 3%. But there are plenty of businesses with much higher dividend yields.
Keep in mind that higher-yielding ASX shares could reduce their passive income and company growth rate (because it's not keeping as much money available to invest for growth).
Having said that, a portfolio with an average yield of 6% would mean the portfolio only needs to reach $500,000. That's half the size!
Reaching $500,000 is a much more achievable total. Going for higher-yield stocks may sacrifice some growth, but we can re-invest the dividends received into more shares and build wealth using compounding.
