Given the current cost of living crisis, it is becoming increasingly apparent to many of us that having a second income would make life easier.
And while it may be too late to get something in place for the current crisis, if readers start preparing now, they could have a second income ready for when one happens again in the future.
But how would we go about generating a second income worth $2,000 a month? Well, with a combination of time, capital, and patience, it is entirely possible to achieve this goal with ASX income shares.
Firstly, we need to work out what our end goal is. A monthly second income of $2,000 is the equivalent of $24,000 a year.
So, our target is to generate $24,000 in dividends each year that we can then distribute monthly as a second income.
The share market typically has an average dividend yield of 4%. However, it isn’t hard to find a quality group of ASX shares that will offer will a 5% yield. So, we are going to base our calculations on that figure.
Doing so, we find that we’re going to require a portfolio valued at $480,000 to generate our desired income from a 5% yield.
While that is certainly a big number, thanks to the power of compounding, investors can grow their portfolio to this level by making regular investments. How long it takes will depend on the capital you have available to invest.
Over the last 30 years, the Australian share market has generated an average total return of 9.6% per annum.
While there’s no guarantee that this will be the case in the future, these returns are in line with historic averages, so it certainly achievable. As a result, we’re going to use this return as the basis of our calculations.
With that in mind, if you were to invest $10,000 into ASX shares each year and earned the market return, you would have grown your portfolio to the $480,000 mark after 18 years.
If you can increase your annual investment to $15,000, you would get there in a touch over 14 years. Whereas a $20,000 a year investment would get you there in approximately 12 years.
And once you do get there, you can switch your portfolio’s focus to income and sit back and watch your second income roll in. The key is being disciplined, coming up with a plan, and sticking with it. Compounding will take care of the rest.
The post How to generate a second income of $2,000 a month with ASX dividend shares! 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.