Investing $500 a month may not sound like enough to change your life.
But give it enough time and the numbers can become surprisingly large.
That is the power of combining regular investing with compounding.
But what about income? Could it help build a major source of passive income? Let's run the numbers.
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Why $500 a month can go a long way
One of the best things about investing regularly is that you do not need to worry too much about finding the perfect time to buy.
By putting $500 into ASX shares like CSL Ltd (ASX: CSL), Goodman Group (ASX: GMG), or Wesfarmers Ltd (ASX: WES) every month, you will inevitably buy during strong markets, weak markets, corrections, and everything in between.
This is called dollar-cost averaging or DCA.
It takes some of the emotion out of investing and turns wealth building into a habit, allowing compounding to start doing more of the work.
What could the passive income look like?
After 10 years of investing $500 a month, the portfolio would be worth approximately $100,000 based on a 10% average annual return. That return is not guaranteed, but it is achievable and largely in line with historical share market returns.
If an investor then moved that money into a portfolio producing a 5% dividend yield, it could generate around $5,000 of passive income each year.
But why stop there? If you keep going for another decade then things start becoming much more substantial.
For example, after 20 years, the portfolio could be worth roughly $360,000. At a 5% dividend yield, that could produce almost $18,000 a year in passive income.
By year 30, compounding has had even more time to work its magic. All else equal, the portfolio would be worth approximately $1 million, capable of generating around $50,000 a year at a 5% yield.
And after 40 years, the same $500 monthly investment could potentially grow to approximately $2.8 million.
A portfolio of that size yielding 5% could produce almost $140,000 a year in passive income. Not bad!
Key takeaway
Investing for passive income is something that takes time. But as the examples above demonstrate, it certainly can be worth the patience.
The main thing is getting started. Investing $500 a month into ASX shares may not look meaningful today. But repeated hundreds of times and given decades to compound, it can become something very material.
