Passive income is a powerful strategy to earn money with minimal effort.
Earning a passive income from ASX dividend shares is a straightforward way to make money to supplement your main income.
Not only that, but it gives you some more financial freedom, helps create a buffer against volatility and also helps you to build wealth over time.
The question investors always ask is: How much do I need to invest in ASX shares to earn the passive income I want?
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A simple calculation
Say you want to earn $500 per month in passive income by investing in ASX shares.
It sounds like a lot, but it's perfectly doable.
Your $500 per month totals $6,000 per year in dividend payments.
The easy calculation to work out how much money you need to invest is to divide your annual dividend income by the dividend yield of the ASX stock you're considering.
In other words, $6,000 divided by an average dividend yield of, say, 3.5% equals $171,428.
That $171,428 figure is what you'd need to invest in order to earn your $500 monthly dividend payout.
The problem is that the figure will vary wildly depending on the dividend yield of the ASX shares you'd be buying.
For example, if you're buying ASX shares with a 4% dividend yield, you'd need to invest $150,000 to receive the same passive income.
For ASX shares with a 5% dividend yield, you'd need to invest $120,000.
Then for ASX shares yielding 6% or 7% you'd need to invest $100,000 or $85,714 respectively.
As the dividend yield increases, your upfront investment decreases.
Can't I just invest in high-yield shares?
Technically, yes, but it wouldn't be a good idea from an investment perspective.
Generally, the higher the yield, the higher the risk associated with that ASX stock. Rather than trying to get rich quickly, your focus should always be on earning sustainable passive income over the long term.
The key is consistency and lots of patience.
And remember, you don't need to invest the whole sum in one go. Start with a monthly investment and let compound growth do some of the hard work for you.
A regular contribution of $500 per month is a great start and could take around 17 years to reach a $171,000 portfolio. If you can make additional payments, or even hike that to $1000 per month, it'll easily cut 7-8 years off your timeline.
