Buying ASX shares with a spare $500 a month sounds modest, but over time, those numbers can quickly stack up.
It is not a strategy that depends on picking the next great growth stock. Instead, this investing strategy depends on time, consistency and letting compounding do the heavy lifting.
Let's run through what the potential for you is.
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Why $500 a month into ASX shares works
The appeal here is simplicity.
You are not trying to time the market or trade around reporting season. Rather, you are buying a slice of the Australian share market every single month, in good years and bad ones.
That means you automatically pick up more units when prices fall and fewer when they run hot, which smooths out your average entry price over the long haul.
Two of the cheapest ways to get exposure to the ASX are through the Betashares Australia 200 ETF (ASX: A200) and the Vanguard Australian Shares Index ETF (ASX: VAS).
A200 tracks the 200 largest companies on our market, and charges a management fee of just 0.04% per annum, which works out at $4 a year for every $10,000 invested.
VAS casts a slightly wider net, holding 321 positions as at 31 July for a 0.07% annual fee.
Either way, the cost of owning hundreds of ASX shares in a single trade is remarkably low.
What 20 years of ASX shares could be worth
Here is where it gets interesting.
Since its inception in May 2009, VAS has delivered an annualised return of 9.17% after fees.
Let's use that figure as a starting point. Investing $500 a month for 20 years means contributing $120,000 of your own money over that period.
At a 9.17% annual return with distributions reinvested, that would grow to roughly $341,000.
More than $221,000 of the final balance would be growth rather than contributions.
Markets rarely cooperate that neatly, so it is worth stress-testing the assumption.
At a more conservative 7% per annum, the same $500 a month becomes about $260,000. At 10%, the figure is closer to $380,000.
The range is wide, but every scenario finishes a long way ahead of the cash you actually put in.
The income these ASX shares could generate
The last piece of the puzzle is what the portfolio might pay you.
A200 currently carries a 12-month distribution yield of 3.2%, which becomes 4.2% on a gross basis once franking credits are counted.
Applied to a $341,000 balance, that is roughly $10,900 a year in cash distributions.
Grossed up for franking, that figure is closer to $14,300.
What's more, unlike a term deposit, the underlying capital also has the potential to keep growing alongside the earnings of Australia's largest listed businesses.
Foolish takeaway
None of this is guaranteed, and the past fortnight is a useful reminder of that.
The S&P/ASX 200 Index (ASX: XJO) fell in five of its last six sessions to Friday, dragged lower by the materials and financials sectors.
The Reserve Bank also left the cash rate on hold at 4.35% on 11 August, noting that headline inflation is still too high.
But that volatility is why a fixed monthly amount works so well. It removes the temptation to guess when the bottom has arrived.
For investors who want a simple way to own Australia's biggest companies, buying low-cost index ASX shares consistently remains one of the more dependable paths available.
