$20,000 stashed away? Here’s how I’d use it to target a $1,750-a-month passive income

Wouldn’t it be nice to generate a lasting source of income without having to ever break a sweat?

Well, the good news is that it is possible and the Australian share market is a great place to generate passive income.

This is because there are plenty of ASX shares that distribute a portion of their profits each year in the form of dividends.

Passive income from the share market

In light of the above, if I had $20,000 stashed away in a Commonwealth Bank of Australia (ASX: CBA) bank account or under my bed, I would consider putting it to work in the share market.

However, while it would be tempting to start reaping the rewards of my investment immediately, I think the smarter move is to let my investment compound.

After all, if I can grow my $20,000 into something larger, the potential passive income I generate will also be larger.

Nothing is guaranteed in the share market, but it is widely accepted that a 10% per annum return is possible. This is in line with the historical return of the share market.

With a 10% per annum return, my $20,000 would grow to become worth approximately $135,000 in 20 years. At that point, it could now be worth considering turning it into a source of passive income.

If I were able to build a portfolio of ASX dividend stocks with an average dividend yield of 6%, my $135,000 would pull in dividends of $8,100 a year. That’s the equivalent of $675 a month if distributed evenly across the months.

Should I keep going for longer? Let’s see what would happen if I did.

30-year timeframe

If I were to let my $20,000 compound at 10% per annum for 30 years instead of 20 years, it would grow to a sizeable $350,000.

The passive income on this amount would be significantly more. As before, with an average 6% dividend yield, I would be looking at dividends of $21,000 per annum.

This equates to monthly passive income of $1,750, which is more than double what I would have received if I stopped the process 10 years earlier.

It is also worth noting that my investment portfolio would continue to compound, albeit at a slower rate, after withdrawing dividends each year. This means that my income stream continues to grow year after year without having to lift a finger.

Overall, I believe this demonstrates just how wealthy you can become when you put your spare capital to work in the share market.

The post $20,000 stashed away? Here’s how I’d use it to target a $1,750-a-month passive income appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro 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.