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What is Residual Income? Residual Income vs Passive Income

1451 words8 min read
  • Name
    Sam Thomas

If you want to create long-term financial wealth without additional work to your everyday life, residual income can help you. This kind of income can grow your wealth passively; in other words, you can earn money even when you are sleeping. The chance of getting residual income is higher, thanks to a rising number of online platforms and opportunities.

Many of you may find it vague about the definition of residual income and the ways to earn it. This guide will clarify what exactly it and its differences with passive income, and shed light on five ideas to build it in your way. Let's find out the answer of What is Residual Income and Is It Different From Passive Income? right now.

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What is Residual Income?

Residual income is when you proceed to get paid after you do your work. Royalties from books, movies, songs, real estate-related income, the yield of business investments are examples of residual income.

Residual income originates from creating an asset that pay you even after the work is no longer executed. Whoever with a book, movie, or song can earn royalties from it. A landlord with a house as an asset can have rent, and a business is an asset to the business owner who does not have to be in charge of the daily activities necessarily.

Residual Income vs Passive Income: What’s the Difference?

Passive Income

With minimal effort, you can earn passive income, and individuals and businesses can earn it regularly like an investment or peer-to-peer (P2P) lending. The Internal Revenue Service (IRS) differentiates it from earned income, which is the money earned from an entity not related to you. Keep in mind that earned income is anything you work for like wages, salaries, tips, commissions, and bonuses. On the other hand, to get a passive income, you have to be an investor or silent partner, not the one setting up the business.

The passive income is high enough, which means that you can become available to perform other things other than work. Even though setting the mechanism for passive income may be risky, its financial security is high. With steady cash flow, passive income is secure as it’s not linked to your time.

If it is not high enough for you to leave your day job, have an extra source of earnings, and what you get from working. Your quality of life will be improved by shifting more of your annual income to a passive source, particularly if you are in debt or have to take care of a dependent.

For example, the proceeds obtained from a rental property owned by investors who do not directly manage it are passive income. Or, you can get a dividend from a stock that follows an annual payment. The only effort an investor put in to achieve passive income is to buy the stock.

All in all, residual income can be passive, yet, the reverse is not true as passive income isn't always residual.

Residual Income

Residual income is a type of passive income because entities may get it effortlessly. Yet, it may vary by the context, be it in the aspect of personal finance, corporate finance, or equity valuation. Let's find out more about each area.

Personal Finance

Residual income here is what is left of a person after all personal debts and expenses being paid. You can base on the income level to determine a potential borrower's creditworthiness.

For example, banks use residual income to find out if a mortgage is affordable to an applicant, based on the cost of living in a specific area. The bank calculates residual income by the bank by deducting the mortgage payment, property insurance, taxes, and other monthly payments like credit cards, installment accounts, or student loans from their monthly income. The residual income is the result.

Corporate Finance

In terms of corporate finance, residual income is the operating income or profit surpassing its required rate of return (RRR) of a business. After the capital costs are paid, the residual income is any profit left. The business owner uses this type of income to evaluate capital investment or business unit performance.

Equity Valuation

Regarding equity valuation, residual income is an economic earnings stream and the valuation method for estimating a stock's value. The residual income valuation model values a company as the sum of book value and the present value of expected future residual income. To calculate this amount, the cost of net capital is deducted from net income.

If used in investment valuation, residual income is the amount of net income created that exceeds the minimum return rate.

How to Build Residual Income

You can build sources of residual income that fit your background, namely based on your interests, skills, and business knowledge. Even if you are a newbie in a certain field, you can get the most out of various resources to master the required skills.

The residual income's key concept is to exploit the time and money of other people to generate stable sales. Be it an online product that remains to be sold or a rental property that is perpetually fulled, residual income requires hard work from scratch, yet the effort and time become gradually smaller when the investment is operating.

5 Residual Income Ideas You Can Start Today

1. Build an Online Course

If you know how to cook various traditional dishes or create a hand-made soap, you can build an online course or video to share with others. Websites like Udemy and Teachable enable you to build a course, like how to master a particular skill or write a CV. After you build your course and set the price, the burden is off you. For each individual signing up for your course, you will start to earn residual income for yourself.

2. Write a Book

If you are an expert on a certain topic and are talented for writing, you should share your expertise by publishing a book or eBook. For every book sold, you can earn some money as almost every publishing contract involves royalties. More specifically, when you write and publish the book, you are bound to earn future fortunes.

You can consider self-published Ebooks with a speedier process. With Ebooks, you can expedite the process to build residual income compared to the conventional publishing method. It will take around a few weeks for your book to be published and ready for sales.

3. Rental Out Your Property

If you have a spare bedroom ready for lodging, you can do it on such sites like Airbnbor VBRO.com. The choice for this type of lodging has been increasingly popular, helping you get a good residual income.

Even though you have to perform tasks like booking renters or hiring house cleaners, the income is fundamentally passive. Keep in mind the guidelines for your city before continuing.

4. Investing

Investment is such a fantastic source of income if made properly. Consider risking your money in high dividend stocks, peer to peer lending, or real estate. Research carefully and communicate with a tax advisor to realize the most proper investing strategy.

5. Create an App

To build an app, no coding knowledge is required. As long as you have an idea for the app, you can hire the competent individual designers and coders. If you have the coding, that's good, you save yourself a certain amount of money.

With a compelling and influential app, you can create residual income through app downloads and ads. Leverage your past experiences to create an app that you believe to be effective.

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Gaining wealth from residual income enables you to have a more flexible lifestyle with a diverse financial portfolio. You have to be hardworking and determined during the cash outflow at the beginning of the work arrangement.

Once again, never underestimate this sustainable way to be wealthy. Try your best, and see how it transforms your life.

If you have any questions, do not hesitate to leave a comment in the box below. We are glad to help you out. If you find this post useful, you can share this with your friends.

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