How I'd target $25,000 passive income with just $250 a month

It doesn't take a huge investment to eventually have massive amounts flowing into your bank account for no work.

Woman smiling with her hands behind her back on her couch, symbolising passive income.

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

Passive income in the tens of thousands each year might seem like the stuff of dreams, but it's well within the reach of the average Australian.

And it doesn't require constant buying and selling, which takes time and money.

If you employ a buy-and-hold strategy of quality ASX shares over the long run, there is no reason why you can't turn a $250 monthly investment into $25,000 of annual income without too much effort.

Here's how you could do it:

From little things big things grow

Comparison site Finder recently found Australians had an average of $40,000 saved up.

Let's start a stock portfolio with that, then add $250 to it each month.

If the portfolio can return 10% compound annual growth rate (CAGR) in the long term, you are on your way.

After 15 years, you'll find the pot has grown to a tidy $262,407.

Graph showing how $40,000 grows into $262,407 after 15 years

What type of ASX shares should one buy to go from $40,000 to $260,000? Growth or dividend?

It actually doesn't matter.

I have a personal preference for growth shares, but the ASX is blessed with many high-performing dividend stocks that could easily provide you 10% CAGR.

You just need to make sure any dividends are immediately reinvested along the way, so that they will contribute to your 10% goal.

Don't create more work for yourself

If you don't want to be buying, selling and stressing on a daily basis, you will want to pick quality businesses with long-term drivers.

Even still, it's prudent to review your holdings every month or quarter to make sure your investment thesis for each stock still holds up.

If it doesn't, then ditch and find another stock that satisfies your criteria.

You will also want to diversify the portfolio. This can be in terms of industries, geography or client demographics.

This will also smooth out the journey so that you don't have to maintain the portfolio as regularly.

Now, with $262,407, how do we get $25,000 of passive income out of it?

Easy. If the portfolio can maintain 10% CAGR, instead of reinvesting it, simply cash out.

Then you will be pocketing an average of $26,240 of passive income each year.

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Investing Strategies

A bland looking man in a brown suit opens his jacket to reveal a red and gold superhero dollar symbol on his chest.
Growth Shares

3 exciting Australian growth shares to buy with $3,000 in August

Analysts think these shares could be top buys for Aussie growth investors.

Read more »

A businesswoman weighs up the stack of cash she receives, with the pile in one hand significantly more than the other hand.
ETFs

Does the VanEck Wide Moat ETF really have a 6% dividend yield right now?

How can an American-focused ETF pay such a big yield?

Read more »

a man in a business suit sits at his laptop computer at his desk and smiles broadly in an office setting, giving an air of optimism and confidence.
Dividend Investing

Up 25% since April, are Macquarie shares still a good buy for passive income?

A leading expert gives his verdict on Macquarie shares and the passive income on offer.

Read more »

Three women hugging and smiling together.
Dividend Investing

The best passive income streams to help fund your future

There are a variety of ways to unlock passive income on the ASX.

Read more »

Ecstatic woman looking at her phone outside with her fist pumped.
Share Market News

This ASX dividend stock could be primed for a rebound

This ASX lottery tech stock could offer both income and capital growth for savvy investors.

Read more »

Young woman thinking with laptop open.
Dividend Investing

At $4.95, here's the dividend yield you'll get from Telstra shares today

Telstra shares have rocketed, but its dividend yield has gone the other way...

Read more »

Young woman waiting for job interview.
Growth Shares

Australian job ad volumes declined last month. Are Seek shares a sell?

Should investors seek returns elsewhere?

Read more »

A man smiles as he holds bank notes in front of a laptop.
Dividend Investing

2 compelling ASX dividend shares with yields above 6%

Here are two stocks with yields so good you shouldn’t ignore them.

Read more »