Residual income is the amount of money a person has left after covering all expenses, debt, and taxes. Residual income is earned by completing upfront work, and receiving a salary or set wage.
Residual income is excess money that a person has available after they have covered all basic needs and requirements such as rent, food, utilities, insurance, mortgage, and taxes. The residual income is oftentimes referred to as discretionary income, as its cash that one is able to spend at one’s discretion.
For starters, residual income is oftentimes a set salary or wage a person receives after completing upfront work. This could entail a job or any service that a person renders and receives payment thereof.
Passive income, on the other hand, is more considered as a previous investment or purchase of an asset that generates income without having to put in additional or upfront work. An example of passive income can be a rental property, real estate, a private equity fund, stocks that pay dividends, or renting out a room or part of a house as an Airbnb.
A person is able to have both a residual and passive income, but each is taxed differently by the IRS.
To ensure financial well-being or financial freedom, it’s advised that a person considers that a residual income should cover all basic needs, requirements, and expenses before creating passive income.
Residual income has different forms, and can be any of the following:
A person can also attain residual income through different projects and side hustles such as starting a small online business or offering a service that can help render additional income.
Here are several examples of residual income:
An author writes a book and receives a royalty payment every time a copy is sold. The initial work involves writing and publishing the book, but once it’s on the market, the author can continue to earn income as long as the book continues to sell.
A salesperson may earn residual income through commissions from clients they have previously acquired. For example, if a salesperson works in the insurance industry and sells a policy to a customer, they may receive a percentage of the premium as commission for as long as the customer keeps the policy active.
In network marketing, individuals can earn residual income by recruiting others into their sales network. Once the initial recruitment and training have been completed, a person can continue to earn a percentage of their recruits’ sales without having to put in additional work themselves. This income is generated from the sales made by the people they have recruited and trained.
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