If you're wanting to build lifelong passive income, you don't have to start with a huge lump sum.
That's because thanks to the power of compounding, investors with a long investment time horizon can make small investments that have the potential to grow into something material further down the line.
But how small is small? The good news is that investing the equivalent of the price of a skimmed oat latte each day into ASX shares could be enough to grow your wealth.
Passive income tips and tricks
The first tip is coming up with a plan and sticking with it. This is far harder than it sounds, especially early on when it looks like there's little to no progress being made. But persevering and trusting the process could certainly be worth it.
Since 1965, the S&P 500 index on Wall Street has generated an average annual return of 9.9% per annum. While there is no guarantee that this will be the case over the next 50-something years, it is reasonable to assume (and hope) that future returns will be closely in line with this.
This means that if you were to invest $5 a day into the share market (that could be via micro-investing platforms or saving into larger amounts and investing through brokerages like CommSec), you could build a very large nest egg in time.
For example, $5 invested each day equates to $1,825 a year. If you did this for 10 years and earned a 9.9% per annum return, you would have grown your portfolio to just under $32,000.
But don't stop there, compounding is only warming up!
Let's go another 10 years doing the same thing. If we did that, your wealth won't have doubled to $64,000, compounding will have taken it all the way to almost $114,000.
Keep going
Warren Buffett's right-hand man at Berkshire Hathaway (NYSE: BRK.B), Charlie Munger, once quipped:
The first rule of compounding: Never interrupt it unnecessarily.
So, let's not upset Charlie. Let's keep buying ASX shares for another 10 years, bringing our investment timeframe to 30 years.
If we do this and earn the same return, we will see our portfolio grow from $114,000 to almost $325,000.
And finally, let's just add a further 5 years to our strategy for good measure. Doing so, would take our portfolio value to just over $530,000.
That's an extra $200,000 in just 5 years, which demonstrates just how powerful compounding becomes the longer you leave. Charlie might be onto something!
Passive income time
Now we have built up the value of our portfolio, we can start to think of passive income.
There are plenty of ASX shares that offer dividend yields of greater than 5%. This currently includes the likes of Westpac Banking Corp (ASX: WBC) and Rio Tinto Ltd (ASX: RIO).
If we were to build a portfolio of ASX shares that average a 5% dividend yield, our $530,000 investment would provide passive income of $26,500 per year (and growing).
All for the price of a coffee each day.
