If you are lucky enough to have $20,000 sitting in your savings account and no plans for it, then it could be worth putting it to work in the share market.
After all, if you were to invest these funds wisely, you could end up with an attractive source of passive income.
Image source: Getty Images
Turning your savings into passive income
If you are able to spread your $20,000 investment across a diverse group of high-quality ASX shares, you could be destined to build significant wealth.
But what makes an ASX share high-quality?
Generally speaking, the highest quality companies are the ones that are leaders in their field, have sustainable competitive advantages, talented management teams, and positive long term outlooks.
Companies such as Goodman Group (ASX: GMG), Life360 Inc (ASX: 360), Pro Medicus Limited (ASX: PME), ResMed Inc. (ASX: RMD), and Xero Ltd (ASX: XRO) immediately spring to mind.
Building a portfolio filled with names like these (and buying them when they are fairly priced) could set you up nicely for the future.
In addition, a portfolio of this nature would likely put you in a great position to at least grow your investments in line with the share market.
Based on historical returns, that are not guaranteed in the future, this would mean an average 10% per annum return.
Growing at 10% per annum
A $20,000 investment portfolio growing at 10% per annum would grow to be worth approximately $135,000 in 20 years without making any further contributions.
But if you were to add to your portfolio modestly through the years, then compounding could go into overdrive and grow your wealth at a much quicker pace.
For example, starting with $20,000 from your savings and then adding $500 a month to your portfolio, would lead to a portfolio growing to approximately $500,000 in 20 years, all else equal.
That would give you significant passive income potential.
Income from a $500,000 portfolio
Once you have compounded your way to $500,000, you could restructure your portfolio to have a focus on income.
Building a portfolio that averages a 5% dividend yield would lead to annual passive income of $25,000. That's the equivalent of over $2,000 a month. All without having to lift a finger.
All in all, I believe this demonstrates why it could be worth putting savings to work in the share market if you have no plans for the funds.
