A bi-weekly paycheck for two more weeks at your job is always a welcome sight, but what if you could get the same result without putting in a fresh 40+ hours each time? Money that keeps paying out long after you stop working may sound like a fantasy, but that’s the reality of residual income.
A common source of revenue for profitable businesses, residual income is something that regular people can access, too. This powerful financial tool, which people often confuse with passive income, could be an excellent way to grow your earnings and improve your capacity to build wealth.
What Is Residual Income?
Residual income refers to continuous cash flow that persists after an initial investment of time, money, or other resources. Residual income streams typically continue to provide money even with no additional input from the owner.
For instance, if you quit or stop showing up to your job, you will cease making the active income it provides. But on the other hand, the residual income you earn from past work or investments will continue paying for a period of time after you stop actively contributing to it.
Some streams of residual income will continue providing income indefinitely. Others will last for a fixed period or as long as certain conditions are met.
There are many ways a person can earn residual income, including:
- Royalties from art or music
- Licensing, such as through a patent or trademark
- Dividends, bonds, and other forms of income investing
In banking, professionals may use residual income to describe someone’s remaining or disposable income after covering their essential bills and necessities. They may use this metric to judge someone’s ability to make loan payments, among other purposes. However, this is not the definition we’re focusing on today.
Residual Income vs. Passive Income
Understanding residual income may remind you of a similar term with much better brand recognition: passive income.
Passive income has become something of a holy grail in personal money management — build up income streams that pay you passively, without you needing to work to continue earning.
However, with widespread attention comes scrutiny, and the concept of passive income is no exception. Critics say there is no such thing as truly passive income since all income sources require some form of initial input. Though we can all agree that there is no way to create a source of income from nothing, some argue that the push behind passive income misleads people into subconsciously believing it.
In this light, residual income is what most people mean when they bring up passive income.
Although residual income is not always entirely passive, the two ideas are primarily the same. The goal, in either case, is to establish a system that continually pays you money even while you follow other pursuits. Whether or not you accept the word “passive” to describe this mechanism, what matters is that it can have a phenomenal impact on your financial life.
Why Is Residual Income Important?
When you ask the ultra-wealthy their secrets to financial success, their answers will vary, but a few themes pop up consistently. One of these themes is the importance of having multiple streams of income.
Having more than one income stream can naturally increase one’s overall income, but that isn’t the only benefit. Diversifying cash flow across multiple sources adds flexibility and resilience to one’s finances. For instance, changing jobs, losing a salary, or instability in an investment are lesser risks when you can rely on other sources of cash.
In most households, the primary source of income is salaries or other forms of employment-based compensation. Active income like this is essential to paying the bills, getting out of debt, and building savings, but it doesn’t scale. Many successfully manage two or even three jobs, but eventually, we all run out of hours in the day to commit to paying work.
Residual income doesn’t have that problem. With money sources that can run on auto-pilot, you can rapidly accelerate your financial growth. This way, you can earn money around the clock, sometimes from multiple sources at once.
The possibility of buying back some of your freedom and reducing your reliance on active job income is a huge selling point for residual income and a founding principle of the FIRE movement.
4 Ways to Build Residual Income Streams
There are countless ways to develop your residual income; the more you do, the more options you will likely discover. Factors like your marketable skills and the assets and liabilities you currently hold will also play a role. However, here are a few residual income examples to get your wheels turning about expanding your household earnings,
Investing is one of the most common and straightforward ways to establish a residual income. Also, apart from the initial input of cash and some routine account maintenance, investing can be one of the most passive income sources there is.
One standard way to classify different investments is as either growth or income-focused. Assets you buy and hold with the intent to sell later at a higher value are growth investments. Assets that you contribute to so that you can gain recurring payments are income payments.
While most investments provide some mix of growth and income, the assets that lead more toward the latter are the ones to focus on if you’re trying to build residual income.
For an early investor, these may include bonds, or stocks and mutual funds that emphasize dividends moreso than growth. Those with access to more capital will have more options for income-centric investing, such as annuities or buying local franchises.
A classic form of residual income, royalties offer a person or group ongoing payments for the continued use of their work.
Authors, performers, various artists, and patent-holders are just a few examples of people who can put upfront work into creating something valuable and then reap the rewards for years to come. As long as there is a market and demand for their work, people can continue to earn royalties as long-tail payments far beyond the time they finish the original work.
Far from typical side hustle territory, royalties are unfortunately not a convenient way for most people to earn extra cash on the weekends. However, with online distribution platforms such as Etsy and Spotify, it is easier than ever for people to put art into the world that will earn an ongoing, if humble, income.
Content creation, the art and business of creating videos, social media posts, podcasts, or articles like this one for online consumption, is a controversial topic when it comes to making money online.
Some argue that it is a lucrative passive income stream because content can continue earning revenue long after a creator publishes it. However, others take umbrage with this classification.
Tying back to the passive income conversation above, some critique that most successful content creators put massive upfront and ongoing work into building their businesses. As such, recommending it as easy money further contributes to the false promise of passive income.
Whether or not it is fair to call it passive, content creation can provide residual income. Established content brands can continue making money for their creators for some time, even as they go about their lives and pursue other ways to earn.
Landlording is one of the oldest forms of residual income around, dating back at least a millennium. Despite the current struggles in the short-term rental market, history suggests that making money by owning property is probably not going away anytime soon.
Rental properties earn investors money in two primary ways: appreciation and rent payments. You can invest in real estate for growth and income simultaneously, which is one reason it remains such a popular asset class.
The rent payment side of the equation is more clearly a form of residual income, although some may also consider the capital growth over time residual. One yields continuous operating income in monthly installments, while the other requires a property sale to be realized. Still, both avenues offer future income potential based on a present-day investment.
Real estate investing is yet another front of the is-it-truly-passive-income debate. But, once again, passive or not, choosing to buy rental property can help you build long-lasting revenue streams largely independent of full-time employment.
Winning a Continuous Payday With Upfront Effort
Building residual income may not always be as passive as some social media personalities would like you to believe. Even so, it can be a powerful tool for improving your financial health.
The skills and resources you possess will influence which options you can access, but there are ways for anyone to develop residual income streams with a bit of grit and patience. So there’s no better day than today to start investigating a few avenues and bringing in some extra recurring cash!