What is Residual Income and Why You Need It

Have you ever wondered why the expression, “the rich get richer and the poor get poorer” seems so true, especially today?  Maybe you’ve said it yourself in a voice dripping with disgust at the water cooler with a coworker.  Maybe you’ve used it to justify to yourself why you are where you are financially.  Maybe you’ve even “taught” it to your children as to why the world is unfair.

But the reality is that the rich get richer because they’ve simply figured out the best way to make money…residual income.

Active or Linear Income

Active income is the MOST common type of income.  It’s income that’s generated by working.  Investopedia defines Active (or Linear) income as follows:

Active income is income for which services have been performed. This includes wages, tips, salaries, commissions and income from businesses in which there is material participation.

Some examples of Active income:

• Your job as an employee (regardless of whether you are paid hourly or salary)
• Your business if it depends upon on you to do the work, i.e., if you take time off, there will be no income.  For example:
  • You own a plumbing business, and you are the plumber out on calls
  • You own a retail location, and you manage the store and its staff
• Consulting or contracting work

You do work, you get paid for that work directly.  If you stop doing the work, the income stops.  Another way to think of it is you are trading your hours for dollars.

Residual, Passive, and Passive Residual Income

To be honest, its a bit simplistic and not entirely accurate to define “residual”, “passive”, and “passive residual” income as the same thing.  I am lumping them together here for simplicity, but there are real distinctions. The important concept is that this type (or types) of income is very different from active income.  This is the type of income that is the key to the wealthy’s kingdom.

Here’s the essence of residual (or passive, or passive residual) income:

Income that is paid to you AFTER your work is complete, or comes from a source in which you are NOT actively involved.  It is referred to as residual because this income can keep coming, week after week, month after month, year after year.  It is referred to as passive or passive residual because this income can keep coming residually with little to no extra work from you.

Some examples of residual income:

• Dividends/interest/gains made on financial investments
• Network marketing, where you enroll customers and recruit other representatives on which you earn commissions on total sales volumes of your organization each week/month/year
• Sales and royalties on a product or intellectual property that you have created, such as a book, or music, or software application, etc.  You have done the work up front (ie, created the product), and are now receving payments for as long as sales are still active.
• Online businesses such as membership sites or courses, where customers continue to pay regularly or sales occur via an automated process.
• Real estate, and most specifically residential or commercial real estate that generate rental/lease income. You have a building and a tenant pays you monthly for use of that building. Flipping a property is NOT residual, and its only passive if you literally took no part in its rehab or resale.

Residual income is about using leverage.  Leveraging work you’ve already done, or work that others are doing on your behalf, either directly or indirectly.  It’s getting paid for work you’ve either done in the past, or contribute to only indirectly.  If you stop working, the income keeps coming!

Why Residual Income is The Key to Freedom

If Michael Jordan, Bill Gates, Richard Branson, or Warren Buffet literally stopped doing any kind of work today and parked their beach chair in the sand, they would still be making money.  That is because they’ve created sources of residual income.

Think about your bills and expenses.  They are residual. They keep coming and won’t stop.  When you continue to build sources of residual income, then at some point that income overtakes the residual expenses.  And when that happens…BOOM!  Freedom…

How You Can Get Started Building Residual Income

You know you need residual income, so how can you practically start to build it as a “regular” person?  You do have to understand that any method for building residual income will require hard work and effort.  But its the results of those efforts that are different for residual income sources as opposed to active income sources.  Here are a few ways that “regular” people can get started:

1. Fund your retirement account and other investements.  Your retirement account and investment portfolio is indeed a source of residual income once you start drawing upon it.  This is the easiest to understand and probably the main way for most active income earners to generate residual income…eventually.  Be warned, for you to acheive financial freedom solely from your retirement and investment accounts, it takes a LONG time, is subject to the volatility of market, and you will need a nut that is greater than 7 figures.
2. Join a network marketing company.  Network marketing opportunities have a very low cost to join, usually provide products or services that are consumable and result in recurring payments from customers, and they allow you to leverage the team that you build by earning residual commissions on the sales of the people in your team.  Be warned, building a network marketing team is hard work.
3. Create something like an online course or write a book.  Once you have created that product, you can build the sytem around it to generate and automate sales.  Be warned, just because you create something, doesn’t mean somebody will buy it.  There can be a ton of work that is required to generate sales.
4. Purchase Real Estate for Rental Income. Be warned, purchasing real estate takes real money, requires ongoing effort, typically requires significant holdings, and can be subject to the volatility of the market.

I have personal experience with all four these, and I’m grateful for each one.  I’ve been funding my traditional retirement from the day I started in my corporate career.  I own rental property (currently divesting of all of my holdings), have built an online course, and am building a network marketing team.

Which is the best type ?  It definitely depends on your individual sitatuation, but if you are mid-career or later, then starting to invest in your retirement now is NOT likely to get you where you need to go by itself.  If you don’t have a chunk of liquid assets laying around, you cannot likely get into the real estate game.  You may simply have NO interest or ability in creating some product.  In my opinion, network marketing is the MOST accessible for all people, given low cost of entry and a skillset that is very learnable.  However, that doesn’t mean its for all people either.  You do need to work hard and grow a thick skin.

Conclusion

Residual income is the key to getting out of the rat race.  When you figure out how to start generating income when you aren’t working, life starts moving in a VERY good direction.  Success, whatever that means to you, requires hard work.  Everybody (or just about everybody) who is successful has worked hard.  So why not work hard on something that will create residual income?