With $7,000 of money to spare, I'd avoid going on a shopping spree and instead invest in ASX dividend shares to build an extra income.
Once I have the right ASX portfolio holdings in place, I can use the passive income this delivers to buy the extra goodies I've had an eye on.
Here's how I'd aim to turn a spare $7,000 into an annual $1,000 extra income.
A diversified ASX investment for $1,000 in annual extra income
With $7,000 to spare, I could invest $1,000 in seven different ASX dividend stocks.
If I were to take this route, I'd primarily target companies paying franked dividends, so I can hold onto more of my extra income when the ATO comes knocking.
I'd also be sure to invest in a range of quality companies trading at fair prices. And ones that are operating in different sectors and parts of the world. That kind of diversity will lower my overall investing risks.
I could achieve similar diversity by investing in a high-yielding ASX exchange-traded fund (ETF).
The BetaShares Australian Dividend Harvester Fund (ASX: HVST), for example, holds anywhere from 40 to 60 ASX dividend shares at any given time.
The ETF's top three holdings are BHP Group Ltd (ASX: BHP), Commonwealth Bank of Australia (ASX: CBA), and National Australia Bank Ltd (ASX: NAB).
BHP, CBA and NAB shares all pay fully franked dividends. And they have lengthy track records of making two annual payments, helping secure that extra income.
But HVST's holdings are more diversified than just the financial and materials sectors. The ETF is also invested across the healthcare, consumer discretionary, energy and industrial sectors, among others.
As for that extra income, as at 31 January HVST had a 12-month dividend yield of 6.6%, franked at 79.5%.
This equates to a gross yield, which includes those handy franking credits, of 8.9%. The one-year gross return, which includes share price moves, is 8.45%.
Judging by the blue-chip portfolio holdings and with history as my guide, I believe that's a sustainable long-term return from this ASX dividend ETF.
Now at those returns, my spare $7,000 would see me earning an annual passive income of $592. That's a fair bit short of my goal.
To garner that $1,000 in yearly extra income at a return of 8.45%, I'd need to own $11,905 of HVST shares.
So I'll be a bit patient and reinvest those dividends into the ETF as they come in.
In a little over six years, I'll have reached that level.
And, if I can hold off going on that spending spree a bit longer, my spare $7,000 will have grown to $12,621 after seven years, offering an annual extra income of $1,066.
