ASX shares can be a great asset class to unlock significant passive income for investors. We could use it to generate enormous levels of annual payments.
Being able to supplement our work earnings with income from our portfolio is a very attractive feature. One day, it could entirely replace our work earnings. We don't have to quit working, but it could bring financial independence and freedom to do what we want to do.
There are a few important steps to unlock that much passive income, which I'll get into below.
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First: Earn money and save it
Money doesn't just appear out of thin air, of course, as much as credit card providers would like you to think that. To begin with, we need to earn a living through a job or our own business, and then live within our means. In other words, spend less than you earn.
Your budget and finances will look different to your neighbour's, and it will be different to the people you work with. I can't tell you exactly what to do with your money, and there isn't a 'correct' way to earn or save. Whether you earn $50,000 or $250,000, the only thing that matters with this plan is how much you save.
Everyone needs to spend some of their money to cover the basics, such as a roof over their head, electricity, and food, among others. But, after that, earning more and avoiding lifestyle inflation with the extra money will help grow savings each month.
Next: Invest
Once you've saved some money, it's time to put some of it into the ASX share market and possibly start generating passive income. You can start investing with an online broker with as little as $500, but it's a good idea to consider a larger amount (such as $1,000) because the brokerage cost would be a smaller percentage of the investment size.
To get the best out of an ASX share investment, I think there are two ways to grow your wealth.
One way is to spend hardly any time at all looking at ASX shares and completely ignore market volatility along the way. This approach has a high chance of delivering pleasing compounding returns while also giving you more time to earn more money or more time for your personal life. Some of the best options for this route, in my opinion, are the Vanguard MSCI Index International Shares ETF (ASX: VGS), VanEck MSCI International Quality ETF (ASX: QUAL), Betashares Global Quality Leaders ETF (ASX: QLTY), Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), and MFF Capital Investments Ltd (ASX: MFF).
The other method is to strive for the best investment returns possible. I'm not suggesting that you go for the most high-risk, speculative stocks you can find, but rather invest in high-quality, long-term ASX growth shares and buy them at attractive prices. I think some businesses that have strong growth potential include REA Group Ltd (ASX: REA), Tuas Ltd (ASX: TUA), Temple & Webster Group Ltd (ASX: TPW), TechnologyOne Ltd (ASX: TNE), Siteminder Ltd (ASX: SDR), Bailador Technology Investments Ltd (ASX: BTI), Guzman Y Gomez Ltd (ASX: GYG), and Pinnacle Investment Management Group Ltd (ASX: PNI).
Final step: Reinvest until you reach your goal
The magic of the ASX share market works best when you reinvest passive dividend income to buy more shares. The best strategy may not be to use the dividend reinvestment plans, instead simply take the dividends as cash and add that money to the best investment choice at the time.
If a portfolio had a (grossed-up, including franking credits) dividend yield of approximately 5%, then it would take a portfolio value of around $1.2 million to reach the $60,000 income goal. That's a lot of money! I didn't say it'd be easy. But, even if starting with a portfolio value of $0, investing $1,000 a month that compounds at 10% per year would become $1.2 million in less than 26 years. A 20-year-old could reach that target before the age of 50.
It's certainly possible to invest more than $1,000 a month or generate investment returns better than 10% a year, which would bring you to your goal faster.
