3 steps to bring in $1,000 per month in passive income

This is how you can make the Australian share market an ATM for passive income…

| More on:
ATM with Australian hundred dollar notes hanging out.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • Investors can earn a passive income from the share market
  • The key is making consistent investments to grow your portfolio
  • This would allow you to then buy dividend shares that send you regular pay checks

There's no denying that having passive income would be very helpful in the current environment.

And while it may not be possible to generate sizeable income from the share market immediately to combat the cost of living crisis (unless you are already sitting on a sizeable cash balance), there's nothing to stop you from making it a long term goal.

That way, you're ready for any cost of living shocks that could occur down the line.

Generate a $1,000 monthly passive income

If you want to generate a $1,000 monthly passive income, you're going to need to generate $12,000 of dividends each year.

There are plenty of ASX shares out there for investors to buy that are forecast to provide 6%+ yields. This includes banking giant Westpac Banking Corp (ASX: WBC), and, as covered here earlier, Charter Hall Long WALE REIT (ASX: CLW) and Woodside Energy Group Ltd (ASX: WDS).

If you can build a diversified portfolio of ASX shares that provides a 6% yield, you will need a portfolio valued at $200,000 in order to generate dividends of $12,000 a year.

Investors that are lucky enough to be sitting on $200,000 can do this now and sit back and watch the passive income roll in.

But if you're starting from scratch, you'll need to come up with a plan.

Three steps to take

The first step is to start making consistent investments in the share market.

By investing $5,000 into the share market each year, your portfolio would grow to be worth $200,000 in 16 years if you earned an average 10% per annum total return.

This return is in line with historical share market averages. And while there's no guarantee that future returns will be in line with this, they could be better or worse, I would be disappointed if the market fell short of these levels.

The second step is identifying a high quality group of ASX shares to buy.

Investors might want to build a diverse portfolio by splitting their $5,000 investment across a number of ASX shares. This could include ETFs, which allow investors to buy large groups of shares in one fell swoop.

The third step is letting the power of compounding work its magic.

Legendary investor Charlie Munger, who is Warren Buffett's right-hand man at Berkshire Hathaway, famously quipped:

The first rule of compounding is to never interrupt it unnecessarily.

This is because compounding really starts to show its magic the longer you leave it, and by prematurely interrupting it, you could miss out on material upside. This includes selling shares or not contributing one year.

For example, 10 years of investing $5,000 and earning a 10% per annum return will turn into $88,000.

However, just six years later you will have grown your balance by a further $112,000 to $200,000 by continuing with the strategy. And keep going another four years and your balance will have ballooned another $115,000 and you'll have a portfolio valued at $315,000.

More on How to invest

A sophisticated older lady with shoulder-length grey hair and glasses sits on her couch laughing while looking at her phone
How to invest

Did you buy the dip on Wesfarmers shares? You just made a motza!

Buying the dip on this ASX 200 conglomerate last month would have been a very good call.

Read more »

Warren Buffett
How to invest

What is the 'Buffett Indicator'? And what is it signalling right now?

Warren Buffett believes this tool is one of the best ways to value the market.

Read more »

person laying on a couch with a hat, symbolising passive income.
How to invest

How to invest: Why Morgan Housel says '99% of good investing is doing nothing'

Doing nothing is often the best course of action.

Read more »

Happy young woman saving money in a piggy bank.
How to invest

How to build a $100k ASX share portfolio with just $250 a month

This is the easy way to build a sizeable investment portfolio without breaking the bank.

Read more »

Man holding out Australian dollar notes, symbolising dividends.
How to invest

Want $1,000 a month in passive income? Here's how to get there with ASX dividends

The share market is a great place to earn additional income without lifting a finger.

Read more »

Warren Buffett
How to invest

4 of my favourite Warren Buffett stock investing quotes

These are excellent lessons from the Oracle of Omaha.

Read more »

Person handing out $50 notes, symbolising ex-dividend date.
How to invest

What could $10,000 invested in ASX shares become in 10 years?

Let's run the numbers and see what is possible.

Read more »

Joyful woman at a beach on the Gold Coast with her arms spread out.
How to invest

How to bank $10,000 a year in passive income from these 3 top ASX shares

Here’s how I’d go about building a $10,000 passive income stream from these top ASX stocks.

Read more »