Passive income is one key reason to invest in ASX shares.
Once you have built a large enough portfolio, money can arrive in your account without having to work another hour for it.
That could eventually mean extra holidays, fewer days at work, help with household bills, or simply more freedom.
Yet I think many people underestimate what they could build by starting with relatively modest amounts.
Let's look at what could happen with $500 a month.
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Getting started
Investing $500 does not feel life-changing in itself.
Even after a year, you would have contributed just $6,000.
But the real value of those early investments is the amount of time they have to compound.
If $500 were invested every month and the portfolio generated an average return of 10% per annum, the balance could grow to approximately $100,000 after 10 years.
After 15 years, it could be worth around $200,000.
And after 20 years, the portfolio could reach approximately $360,000.
These figures assume returns are reinvested and are only illustrations. A 10% annual return is possible to achieve, but certainly not guaranteed.
Overall, I think this demonstrates how seemingly small decisions made today can have major consequences decades later.
I wouldn't chase dividends straight away
If I were starting this portfolio from scratch, income would not be my main priority.
I would want to grow the capital first. That could mean investing in high-quality ASX growth shares such as Xero Ltd (ASX: XRO), Goodman Group (ASX: GMG), and ResMed Inc (ASX: RMD).
Blue chips such as Wesfarmers Ltd (ASX: WES) could also have a role.
And ASX exchange traded funds (ETFs) such as the iShares S&P 500 ETF (ASX: IVV) or Vanguard MSCI Index International Shares ETF (ASX: VGS) could provide exposure to hundreds of global companies.
The aim during these years would be simple. It would be to keep investing, reinvest anything the portfolio pays out, and give compounding as much time as possible.
Turning growth into income
To generate $26,000 of passive income, I would target a portfolio valued at approximately $520,000 and a 5% dividend yield across it.
At our assumed 10% return, investing $500 every month could take the portfolio to this level in roughly 23 years.
Once there, this is when I would start thinking much more seriously about income.
Some of the growth investments could remain, while more money could gradually move toward dividend shares such as APA Group (ASX: APA), Transurban Group (ASX: TCL), HomeCo Daily Needs REIT (ASX: HDN), and Charter Hall Long WALE REIT (ASX: CLW).
A $520,000 portfolio yielding 5% would then produce $26,000 a year.
And all of it could have started with the decision to put aside $500 each month.
