Making $100,000 a year in passive income is a goal that many Australians dream of achieving.
After all, who doesn't want to get paid for doing nothing?
While most people think this dream is impossible, I'm going to show you why it isn't with a combination of capital, time, and compounding.
Let's see how you could do it with ASX shares.
Focus on growth
Unless you're already starting with a huge nest egg, you're going to need to grow your capital base.
Let's imagine that you're starting at zero.
You will want to start with high-quality, blue-chip and ASX growth shares that have the potential to increase their earnings and compound strongly to form the foundation of a future income machine.
Some ASX companies that fit this profile include:
- ResMed Inc. (ASX: RMD) – A global leader in sleep apnoea and respiratory care, with a track record of double-digit earnings growth.
- Goodman Group (ASX: GMG) – A world-class property developer focused on logistics and data centre real estate, benefiting from the rise of e-commerce and cloud computing.
- Macquarie Group Ltd (ASX: MQG) – The millionaire's factory, with diversified earnings from asset management, infrastructure, and global investments.
- WiseTech Global Ltd (ASX: WTC) – A logistics software powerhouse with a sticky global client base and strong recurring revenue.
The power of compounding
Compounding is your best friend when it comes to investing. This is what happens when you earn returns on top of returns, supercharging wealth creation.
With that in mind, if you could achieve an average total return of 10% per annum from your ASX share portfolio, which is in line with historical averages, then that $100,000 passive income could be yours in 30 years if you are able to invest $1,000 a month.
And that assumes you are starting from zero. If you already have a capital base to start with, you could get there much sooner.
Transition to passive income
$1,000 a month in ASX shares compounding at 10% per annum would turn into $2 million in 30 years.
At that point, you have a portfolio that could transition to a focus on passive income through ASX dividend shares.
If you could build a portfolio averaging a 5% dividend yield, you would be pulling in $100,000 in dividend income each year.
And with most ASX shares paying their dividends every six months, you would expect to receive two $50,000 pay checks each year. Not bad if you ask me!
While we don't know which ASX dividend shares will be buys in 30 years, if it were today, you might look at high-quality dividend stocks and ETFs like Telstra Group Ltd (ASX: TLS), Transurban Group (ASX: TCL), and the Vanguard Australian Shares High Yield ETF (ASX: VHY).
Foolish takeaway
Reaching $100,000 in annual passive income doesn't happen overnight. The key is to start with growth-focused, high-quality ASX shares that can compound your wealth over the long term.
Once your portfolio reaches critical mass, you can rotate into income-generating shares and ETFs, allowing your capital to finally pay you to live the lifestyle you want.
