What is residual income?

Now, this is a tricky question. You see, when it comes to residual income, most people assume you’re talking about surplus cash or disposable income. While this definition explains what the term means in the world of accounting, there’s another definition that you ought to brush up on.

In this post, we’ll be discussing what residual income and passive income are all about.

What is Residual Income?

In the world of accounting, residual income isn’t a form of income and is simply a type of calculation that determines how much cash a person has left after paying their bills. It’s calculated using a residual formula that allows banks to determine whether applicants can afford a mortgage or not. In the same way, companies may also use a similar formula to make investment decisions.

However, things get different when we enter the world of passive income. Contrary to popular belief, residual income isn’t the same as passive income so the terms cannot be interchanged.

Define Residual Income

Residual income is the income you generate once the work is done. Over time, residual income can turn to passive income as you regularly begin to get payments for virtually doing nothing.

Examples of Residual Income Options

Earning royalties is practically the most popular example. Recording artists are paid for their songs after they’ve done the work. They continue generating revenue for decades so long as their music is making money from CDs and iTunes. This is the same as earning royalties from writing a book. Eventually, this form of residual income is likely to turn to passive income with the passage of time.

Some other popular examples of earning residual income:

  • Interest paid on savings account
  • Earning money from rent after purchasing a property
  • Amount you earn as a result of advertisements posted on blogs or websites

Benefits of Residual Income

Since, we’ve already discussed what residual income is, let’s move over to our next section: the benefits of residual income:

Saves Time: For starters, unlike earning a salary, residual income methods allow you to make the most of your time. Unlike a regular 9-to-5 job, you won’t be tied to particular location and can travel around the world without worrying about your finances. Not to mention, you won’t have to worry about being stuck with the same salary for a long period of time.

Better Quality of Life: Finding a way to generate substantial residual income can drastically improve your life for the better, especially since you won’t have to continuously put in effort to generate income.

What is Passive Income?

Passive income is the influx of regular cash flow you generate from a venture or activity that requires hardly any effort to maintain over a long period of time. Now there are two important factors to remember here:

  1. For income to qualify as passive income, it must be received on a regular basis, and should roughly comprise of the same amount.
  2. Passive income must require minimal to no effort. This means you shouldn’t be spending – say 20 hours on a “passive income” project.

In other words, your method of earning income must be passive.

Over the last couple of years, passive income has become a buzzword that’s been taking the world of personal finance by a storm. Contrary to popular belief, no method of earning income is truly passive since you’ll have to put in at least some time and effort, even if you’re planning on hiring someone to do the legwork.

So if you think you’ve hit jackpot because spammy blogger promises you can make thousands of dollars by simply doing nothing, you’re terribly mistaken. Fret not, we’re here to help and that’s exactly why we’ve created an entire post on how to make passive income.

Examples of Passive Income Options

Here are some popular methods of earning passive income:

  • Product Development: Creating your own product is one of the simplest ways to create passive income. Rest assured, if you’re not familiar with product development, come up with an idea and hire someone else to do the job for you. Plus, this doesn’t necessarily have to be a hardcore tool or device. You can start by writing your own eBook, creating a software program or a course.
  • Leverage Affiliate Programs: If you have a website or blog of your own, you can generate passive income by using affiliate programs. There are a number of successful affiliate networks that you can use for the task, the most popular names includes eBay,  Amazon, and Clickbank. Some other networks that you can check out include CJ Affiliate and FlexOffers.

What is Residual Income: The Wrap Up

We hope our detailed guide on “What is Residual Income?” has helped you gain a better understanding of residual income and how you can generate it over time.

Learning how to create multiple streams of income is important if you want to gain financial freedom. If you have any questions, don’t hesitate to ask us in the comment section below.

To learn more about earning passive income, check out our post on Cool Passive Income Ideas. Good luck!


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