Investing $100 into ASX shares each month might not sound like it could grow into something significant.
Particularly if you want to generate passive income.
After all, with an average dividend yield of 4%, a $100 investment would yield just $4 of dividend income.
However, you might be surprised to learn that by investing consistently each month for a long period, you could grow your wealth materially.
This is thanks to the magical power of compounding, which is what happens when you earn interest on interest or returns on returns.
Turning $100 a month into passive income with ASX shares
As I mentioned above, the key to growing your wealth is investing this relatively modest sum consistently. This allows you to take full advantage of compounding. But how much could it grow into one day?
Well, historically the share market has generated an average return of 10% per annum. While there is no guarantee that this will be the case in the future, we're going to base our assumptions on this level of return.
With that in mind, if you were to invest $100 a month into ASX shares and earned the market return, you would see your investments grow to become worth approximately $20,000 in 10 years.
While you could generate some passive income at this stage, it really would be worth continuing to invest to grow your portfolio further. Especially now compounding is starting to show its power.
If you were to keep going for a further 10 years, bringing us to 20 years in total, your portfolio would have a market value of approximately $72,000.
Now you have a choice. You could switch your focus to income and invest in high yielding ASX dividend shares that average 6% yields. This would lead to passive income of around $4,500.
Alternatively, you could keep going with your $100 a month investments. This option certainly could be worth it. That's because after another 10 years your portfolio would be worth almost $210,000.
At that point, a 6% dividend yield would generate passive income of $12,600.
Other options
Investors have plenty of options to speed up the process.
For example, if you were to invest $250 a month, all else equal, your portfolio would be worth $50,000 in 10 years, $180,000 in 20 years, and then $520,000 in 30 years. This would position you to generate significantly more passive income from your ASX shares.
Alternatively, investors could increase their contributions as the years go by and their salaries increase.
Ultimately, the keys to success are investing smartly, consistently, and patiently.
