I'd aim to turn a $20,000 savings account into $25,400 of passive income

It doesn't matter if you don't have a pile of cash to start investing. The important thing is to start.

| More on:
A happy older couple relax in a hammock together as they think about enjoying life with a passive income stream.

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

Starting from just a modest amount, anyone can build an ASX stock portfolio to fatten up for a significant flow of passive income later.

Just $20,000, which is about half the savings that the average Australian has, can get you started.

I reckon, eventually, you could sit back and watch an average of $25,000 every year land in your bank account.

It's all possible using the power of compounding.

Check this out:

Invest and keep adding to it

Let's hypothetically assume you can build a portfolio with that $20,000 that can, over the long term, average a compound annual growth rate (CAGR) of 12%.

I contend that this is reasonable, with diligent research and stock selection.

Quality businesses like Johns Lyng Group Ltd (ASX: JLG) and Lovisa Holdings Ltd (ASX: LOV) have managed to return 40.6% and 23.3% per annum over the past five years.

So with a mixture of those sorts of winners, some neutrals and the inevitable losers, there's no reason why your $20,000 can't grow at 12% a year.

Just practise sensible diversification, and act on sensible advice.

But it's not just about investing and then forgetting about it.

Big rewards only come with hard work, and you need to keep saving and adding to this investment.

Assuming that you can afford to add $400 a month, after 12 years of monthly compounding, the nest egg will have grown to $211,436.

Passive income after 12 years of 12%

Now let's have some fun.

From the 13th year, sell off the 12% gains each year.

That will provide you with an annual passive income of $25,372.

Mission accomplished.

Of course, the share market can be volatile, so you won't receive this much every single year. 

In some years, the passive income will be far less. In others, it will be much more.

But if you maintain a portfolio with a 12% CAGR, over the long run the cash flow will average out to $25,372.

The moral of the story is that regardless of how much you can afford to put in, start investing.

You can't buy time, but it's such an important ingredient.

Motley Fool contributor Tony Yoo has positions in Johns Lyng Group and Lovisa. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Johns Lyng Group and Lovisa. The Motley Fool Australia has recommended Johns Lyng Group and Lovisa. 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

Young professional person providing advise to older couple.
Investing Strategies

Why franking credits are a powerful bonus for ASX investors

With super tax changes on the horizon, here’s why franking credits matter more than ever.

Read more »

Smiling woman with her head and arm on a desk holding $100 notes out, symbolising dividends.
Dividend Investing

Buy these ASX dividend shares for passive income

Let's see what analysts are recommending to their clients right now.

Read more »

Business meeting to discuss buy now pay later platform
Dividend Investing

Forget term deposits! I'd buy these two ASX 200 shares instead

I think term deposits have a weak outlook.

Read more »

Happy young couple saving money in piggy bank.
Index investing

Investing in ASX index funds? Here's the ultimate secret to wealth

Warren Buffett reckons anyone can get rich using this tip.

Read more »

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 »