The outlook for interest rates in Australia isn't overly positive.
As I mentioned here recently, Westpac Banking Corp (ASX: WBC) believes that the Reserve Bank of Australia is on the cusp of lowering interest rates.
The banking giant's economic team believes that rates will be cut to 4.1% early next year and then eventually be reduced to 3.35% by December 2025.
Westpac currently offers a 1.85% standard variable rate on its Westpac Life savings account. And while you can boost this with bonus rates, it demonstrates just how little savings accounts could offer once the central bank knocks 1% off the cash rate.
In light of this, if I were sitting on $50,000 and wanting passive income, I would consider putting it to work in the share market.
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Passive income from $50,000 in ASX shares
Firstly, it is possible to generate a 6% dividend yield from a portfolio filled with a collection of the biggest dividend payers.
ASX shares like IPH Ltd (ASX: IPH) and Eagers Automotive Ltd (ASX: APE), for example, are forecast to offer yields around this level.
If I were to do this, I would end up generating $3,000 a year from my savings. This equates to an attractive $250 per month if I distribute the dividend payments evenly.
While this is a nice stream of passive income for just a few clicks of a button, it's not enough to satisfy my hunger for income.
Generating greater income
Instead of going immediately after passive income, I would look to grow my funds first with the power of compounding.
I would buy high-quality ASX shares that have strong business models, competitive advantages, and positive long term growth outlooks. Companies like CSL Ltd (ASX: CSL) and Goodman Group (ASX: GMG) tick a lot of these boxes.
If through these investments I were able to achieve a 10% per annum return, which is in line with the historical market average, my $50,000 would grow to be worth approximately:
- 5 years: $80,000
- 10 years: $130,000
- 15 years: $210,000
- 20 years: $340,000
As you can see above, by putting my money to work in the share market over a number of years, it gives me the potential generate significantly more passive income in the future.
Generating a 6% dividend yield on $130,000 would pull in $7,800 on annual income or $650 a month.
Whereas the same yield on a $340,000 portfolio would generate $20,400 of passive income. This would mean $1,700 of monthly income.
