If you are sitting on $20,000 then it could be worth putting it to work in the share market.
Especially given that in time, these funds could provide you with some serious passive income.
But how could you generate $2,000 a month of passive income from a $20,000 investment in ASX shares? Let's do some calculations.
The Australian share market is a great place to earn passive income because of the many ASX dividend shares that are available to investors.
However, a $20,000 investment wouldn't be enough to pull in $2,000 a month of dividend income. That's the equivalent of $24,000 a year, which is more than your starter balance.
Clearly, you are going to have to grow your investment portfolio first before you start taking a regular pay check from the share market.
It is reasonably easy to build a diversified income portfolio that averages a 6% dividend yield.
This means that if you had a portfolio valued at $400,000, it would generate $24,000 in passive income if it averaged this dividend yield.
IPH Ltd (ASX: IPH) and Eagers Automotive Ltd (ASX: APE) are prime examples of dividend shares with forecast yields in and around the level. There are plenty more.
But forget them for now because your initial focus is less about dividends and more about growing your portfolio.
To do this, you want to look at high-quality ASX shares that have the potential to compound at strong rates for a number of years.
Companies such as Goodman Group (ASX: GMG) and ResMed Inc (ASX: RMD) have been doing this for the past decade and appear well-positioned to continue this trend in the future.
Goodman and ResMed have delivered an average total return of 21.5% and 18.6% per annum, respectively, for 10 years. These returns would have turned a $20,000 investment into $140,000 and $110,000, respectively, over the course of the past decade.
But let's imagine that you can only generate a 10% annual return on average, which is in line with the historical market average. It would take just over 31 years to grow a $20,000 investment portfolio into $400,000.
If you have time on your side then off you go. But if you want to get there quicker, you simply need to put more capital into high-quality ASX shares through the years.
For example, if you were to start with $20,000 and then invest $1,000 each month, you would reach the $400,000 mark in approximately 13 and a half years. That's 18 years sooner than if you didn't make additional contributions.
At that point, you could reshape your portfolio to average a 6% dividend yield and sit back and watch the passive income come flooding in.
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