If you have $25,000 sitting in a savings account earning very little in interest, you might want to reconsider how that money is working for you.
While savings accounts offer safety, they won't do much in terms of wealth creation.
Instead, putting those funds into ASX shares could help transform your money into a powerful cash-generating machine over the long run.
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Investing $25,000 of savings
Investing in high-quality ASX shares with sustainable competitive advantages has historically provided far greater returns than a bank deposit.
The Australian share market has delivered average returns of around 10% per annum over the long term. There's no guarantee it will do this again in the future, but I think it is reasonable to aim for this sort of return from investments.
With that in mind, if you put your $25,000 to work in a well-diversified portfolio of top-tier ASX shares and let compounding do its thing, it could be a very rewarding endeavour.
For example, if your portfolio grows at the 10% per annum target rate, after 25 years your initial $25,000 investment could balloon to approximately $275,000. That's without making a single contribution along the way.
If you wanted a larger amount to play with, you could look to put an additional $2,500 per annum into ASX shares. All else equal, this would grow your portfolio to approximately $540,000 over the same time period.
What about the cash?
The real magic happens when you transition from growth to income. By focusing on ASX shares with a strong history of dividend payments, you could start generating serious passive income.
Assuming a 6% dividend yield across your portfolio at that stage, you'd be pulling in around $16,500 per year in passive income from a $275,000 portfolio.
Whereas if you were to have grown your portfolio to $540,000 by making annual contributions, a 6% dividend yield would pull in $32,400 of yearly income.
That's a significant amount of cash rolling in—without having to lift a finger. And given that dividends tend to grow over time, this income stream could continue to rise above inflation.
Of course, this strategy works best if you're patient and willing to hold quality stocks for the long haul. And it is worth remembering that investing does come with risks, and the market will have its ups and downs. But history shows that over long periods, ASX shares have rewarded those who stay the course.
By shifting focus from short-term savings to long-term compounding, you could turn a stagnant $25,000 into a financial asset that pays you handsomely for a long time to come.
