No doubt many Aussies are feeling the financial pinch this time of the year. Fortunately, now is a good a time as any to begin building a second income by investing in ASX dividend shares.
And one needn't have a substantial amount of cash tucked away to do so. I would invest for my future even if I could only spare $5 a day.
Here's how I would go about it.
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How I would choose ASX shares for my portfolio
Of course, there's a bit more to investing than that. I would need to identify the ASX shares I felt capable of providing consistently strong returns.
Personally, I would look for companies with decent cash flows, manageable debt levels, and competitive advantages. Above all, however, I would look to invest in a diverse set of companies I understand and believe in.
One such share could, in my personal opinion, be supermarket operator Woolworths Group Ltd (ASX: WOW) – and Goldman Sachs agrees.
Though, even then the most considered investment isn't guaranteed to offer share price appreciation or dividends in the future.
I would also consider my $5 a day investment the baseline and never waver from it. Ideally, I would grow my daily or monthly contribution over the year to grow my second income stream faster.
How much income could a daily $5 investment create?
A fiver a day invested in ASX dividend shares might not sound like much, but it can add up over the long term. Particularly if we consider the benefits of compounding. Let's do the math.
Saving $5 a day will see an investor with around $152 set aside each month, or $1,825 a year.
But I wouldn't use that extra cash as spending money. I would reinvest my dividends for years before I begin to take them as passive income.
The S&P/ASX 200 Index (ASX: XJO) returned an average of around 9.3%, including dividends, over the last 10 years.
If I managed to realise such a return and compounded my dividends by reinvesting them in ASX shares, my portfolio would be worth $37,401 in 12 years' time.
At that point, it would be capable of paying $155 a month in passive income if I achieved a 5% dividend yield.
However, by investing $5 a day consistently for 25 years, my portfolio could grow to $161,540 and be capable of offering approximately $8,000 of annual passive income – all for $5 a day.
