Here's how investors can consider saving and investing $5 a day to make $2,500 a month in passive income!

Anyone can build up passive income. Here's how.

Beautiful young couple enjoying in shopping, 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 is really appealing to me – it's great being able to receive dividends as cash without needing to put in any work for it each year. ASX dividend shares can be the answer for investors wanting that cash flow.

But don't assume that you need to have hundreds of thousands of dollars to benefit from passive income. Most brokers allow investors to make their first investment with as little as $500.

If someone can start saving just $5 per day, they can start building towards creating a pleasing source of passive income.

Start saving

If we think about saving $5 per day, which is a bitesize goal, that translates into an annual total of $1,825.

The great thing about saving cash at the moment is that we can receive a good amount of interest from the bank. Some bank savings accounts offer an interest rate of at least 5%.

How much do we need to save to start investing?

Some online share brokers offer a very low level of brokerage fees for transactions worth $1,000 or less, so I'd do some research to pick which broker to go with.

Once I'd saved between $500 to $1,000, I'd want to start investing. I'd try to minimise my brokerage costs, so investing closer to $1,000 would make more sense. Don't forget, you can earn interest while building towards that desired total.

Begin investing

Once we've built up some savings, it's time to put the money to work.

I think there are a few good ways to start building passive income. In this article, I'll point out ASX dividend shares and ASX-listed exchange-traded funds (ETFs).

Individual companies can provide a pleasing source of dividend income. They could be ones with a higher dividend yield, such as Telstra Group Ltd (ASX: TLS) or Centuria Industrial REIT (ASX: CIP), or ones that are building a track record of growing their payments consistently such as MFF Capital Investments Ltd (ASX: MFF) and Brickworks Limited (ASX: BKW).

Investors can also choose to own ETFs for passive income, which gives them access to a large part of the share market. Investors can access the global market with ETFs like the Vanguard MSCI Index International Shares ETF (ASX: VGS) and the VanEck MSCI International Quality ETF (ASX: QUAL). Meanwhile, ETFs like the Vanguard Australian Shares Index ETF (ASX: VAS) can give exposure to the Australian markets.

It's great to own a diversified portfolio with a single investment and just track the long-term wealth creation of the share market for a low fee.

Passive income

Once we start investing, the passive income will roll in.

Our investment decisions will dictate what dividend yield we get from each investment, but I'll use 5% as an example yield.

If someone invests approximately $1,000 into ASX shares with a 5% dividend yield, that would unlock $50 of passive income. Perhaps that investment will grow its payout by 10% and in 12 months the payment would be $55.

Plus, after some more saving, we can decide to invest another $1,000 and unlock an additional $50 of passive income (assuming the dividend yield is still 5%). That would take the annual passive income to $105.

And so on.

Keep on investing in ASX shares and watch that passive income grow.

The ASX share market has delivered an average return per year of 10%, so if the $5 figure per day can be invested and grow at 10% per annum, it'd become worth $602,000 after 37 years. That's almost exactly how much someone would need to receive $30,000 per year, or $2,500 per month, of passive income from their portfolio with a 5% dividend yield.

Should you invest $1,000 in Brickworks Limited right now?

Before you buy Brickworks Limited shares, consider this:

Motley Fool investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Brickworks Limited wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

And right now, Scott thinks there are 5 stocks that may be better buys...

See The 5 Stocks *Returns as of 9 January 2025

Motley Fool contributor Tristan Harrison has positions in Brickworks and Mff Capital Investments. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Brickworks. The Motley Fool Australia has positions in and has recommended Brickworks and Telstra Group. The Motley Fool Australia has recommended Mff Capital Investments and Vanguard Msci Index International Shares ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Personal Finance

A worried woman looks at her phone and laptop, seeking ways to tighten her belt against inflation.
Personal Finance

How does your debt level compare to the average Australian?

Some debts are better than others...

Read more »

Woman on a swing at a beach, symbolising passive income.
Personal Finance

Want to earn more passive income from ASX shares than your job? Here's how I'd do it

This is a good time to start building investment income.

Read more »

A couple are happy sitting on their yacht.
Personal Finance

There are 2.8 million Australian millionaires. Here's how to become one of them

There are more millionaires amongst us than we might think.

Read more »

Beautiful holiday photo showing two deck chairs close-up with people sitting in them enjoying the bright blue ocean and island view while sipping champagne and enjoying the good life thanks to Pilbara Minerals share price gains in recent times
Personal Finance

Want to retire early with $1 million? Here's how

A mixture of savings and investing can create wonderful results.

Read more »

A man walks up three brick pillars to a dollar sign.
Personal Finance

How to replace your wage with passive income in 3 steps

It’s a straightforward process to replace a salary with dividends.

Read more »

Cubes with tax written on them on top of Australian dollar notes.
Tax

How much tax do your ASX shares pay? Why it might matter

Taxes. One of the two unavoidables in life.

Read more »

a small girl empties a piggy bank of coins onto a table while her mother looks on in the background.
Personal Finance

Relying on bank term deposits to build wealth? You need to read this

Looking to grow your net worth? Term deposits may not be the best choice.

Read more »

Elderly couple look sideways at each other in mild disagreement
Retirement

How would the proposed unrealised gains tax impact your superannuation?

If passed, the impacts could be profound for those with higher-end super balances.

Read more »