I think virtually every Australian adult would love to be financially independent, where you don't have to rely on your work earnings to sustain your life expenses. I believe dividends from ASX dividend shares could be the answer.
This is a great time of year to look at potential financial goals. What could be better than building enough wealth that pays tens of thousands of dollars in dividends?
But, a large nest egg doesn't appear out of nowhere – it'll take consistency and good financials choices. I believe it boils down to three steps.
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Save money
Being able to put money into the ASX share market comes down to one simple equation: spending less than you earn.
If someone earns $10,000 and spends $11,000 per month then they won't have anything to invest. Earning $6,000 and spending $5,000 per month would be a better monthly financial picture, in my view, because it would mean having $1,000 to put into wealth-growing assets.
It takes money to make money in the ASX share market, so for someone to unlock savings with a tight/negative budget, they may need to earn more, spend less or both. The extra earnings could come in the form of a side hustle/part-time job. Every household has different spending requirements, but finding value for money with the biggest categories (food, transportation and so on) is usually a useful strategy.
Invest for the long-term in ASX shares
Compounding is a very powerful financial force. Albert Einstein once supposedly said:
Compound interest is the most powerful force in the universe. Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't pays it.
The longer we give our investments to grow, the more they can help our net wealth become a meaningful figure.
There are a number of appealing investments we could make for the long-term. I'd want to own ASX shares/investments that I think could grow nicely in value over the long-term.
For capital growth, I'm thinking of exchange-traded funds (ETFs) like Vanguard MSCI Index International Shares ETF (ASX: VGS), VanEck MSCI International Quality ETF (ASX: QUAL) and Betashares Global Quality Leaders ETF (ASX: QLTY).
For long-term dividends and growth, I'd look at names like Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), MFF Capital Investments Ltd (ASX: MFF) and Wesfarmers Ltd (ASX: WES).
Replace your wage with dividends
By regularly investing, preferably monthly, Australians can steadily build up their portfolio enough to generate enough passive income to replace a wage with dividends through ASX shares.
Remember, the ASX share market has returned an average of close to 10% per year over the ultra-long-term. If an investment grows at 10% per year, it doubles in value in around eight years.
Trying to replace a wage could take time, but consistent effort will pay off. If someone can invest $1,500 per month into ASX shares (and never increasing that amount) and it grows at an average of 10% per year, it would turn into $1 million after 20 years and $1.5 million in less than 24 years.
If your portfolio had a 5% dividend yield, $1 million would unlock $50,000 of passive income, while $1.5 million would unlock $75,000 of dividends from ASX shares. That sounds good to me!
I think investing in ASX shares is the best way to build a river of passive dividend income, with franking credits being a major boost.
