Got $50k of savings? Here’s how I’d turn that into passive income of $10k a year

If you are sitting on a $50,000 savings balance and want to turn it into passive income, then the share market could be the place to do it.

But if you want to pull in $10,000 of income from ASX shares, it won’t happen overnight.

Here’s how I would try to achieve this goal.

Don’t rush the passive income stage

If I had $50,000 of savings and wanted to eventually generate $10,000 a year of passive income, I would not immediately chase the highest dividend yields on the ASX.

That can be tempting. A 9% or 10% yield might look like a shortcut. But very high yields can sometimes be a warning sign that the market expects the dividend to be cut.

Instead, I would split the journey into two stages.

The first stage would be about growing the portfolio. The second stage would be about turning that larger portfolio into income.

I think that distinction is important. Trying to force $10,000 of income out of $50,000 would require a 20% yield. I do not think that is realistic or sensible for most investors.

But growing $50,000 into $200,000 over time is a much more practical target.

Let compounding work for you

Let’s assume an investor can achieve an average annual return of 9% from a diversified ASX share portfolio.

That is not guaranteed. Some years will be much better, and some years could be negative. But as a long-term assumption, it is a useful way to understand the power of compounding.

At a 9% annual return, $50,000 could grow to around $200,000 in just over 16 years, assuming returns are reinvested and no extra money is added.

And if you add more money along the way, the timeline could be shorter.

What I’d invest in

During the growth stage, I would focus on quality rather than just income.

That could include a mix of ASX blue-chip shares, growth shares, and exchange-traded funds (ETFs). I would want businesses with strong balance sheets, durable earnings, and the ability to reinvest for growth.

This could mean an ETF like iShares S&P 500 AUD ETF (ASX: IVV) or an ASX share like Wesfarmers Ltd (ASX: WES).

I would also want diversification. Relying on one bank, one miner, or one high-yield dividend share would make the plan more fragile than it needs to be.

Once the portfolio grows to reach around $200,000, I would then start thinking more seriously about passive income.

A 5% dividend yield on $200,000 would produce $10,000 a year in passive income. That could come from a mix of dividend shares, infrastructure stocks, listed property, and income-focused ETFs like the Vanguard Australian Shares High Yield ETF (ASX: VHY).

Some investors may also receive franking credits from certain Australian dividend shares, which could improve the after-tax outcome depending on their situation.

Foolish takeaway

I think the trick is not to ask a $50,000 portfolio to do a $200,000 portfolio’s job.

At the start, I would want the money working hard for long-term growth. Later, when the portfolio is large enough, the focus can shift more naturally towards income.

That approach requires patience, but it avoids the trap of chasing unsustainable yields too early. In my view, that is a much cleaner way to turn today’s savings into tomorrow’s passive income stream.

The post Got $50k of savings? Here’s how I’d turn that into passive income of $10k a year appeared first on The Motley Fool Australia.

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• With first-half profits jumping to $1.6 billion, are Wesfarmers shares a buy today?
• Why Fisher & Paykel Healthcare, GR Engineering, Kogan, and Wesfarmers shares are pushing higher

Motley Fool contributor Grace Alvino has positions in Wesfarmers. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Wesfarmers and iShares S&P 500 ETF. The Motley Fool Australia has recommended Vanguard Australian Shares High Yield ETF, Wesfarmers, and iShares S&P 500 ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.