Another group of phrases you will see quite a bit on this blog are passive income and residual income. What do these mean?
In the most simplistic terms, these terms can be summarized as getting more “bang” for your sweat. In other words, passive and residual income yields a higher return on time invested in a venture.
The average person who works a job does not have the luxury of earning a passive and residual income. That’s because employers pay a fixed salary by the hour or by the year. Sure there are bonuses here and there, but those are not guaranteed, and if paid out they are capped off at a certain amount.
Essentially, the average working person is trading their hours for dollars where there is a one to one ratio between the work they put in (hours) and the pay they receive (dollars). When they stop working, the dollars stop coming in. In other words, there is no scalability, or the ability to generate more money for the same amount of time investment. Therefore, the average working individual only gets ahead by getting a salary raise. But even so, their income is fixed (or capped off at a certain level).
When you think about CEOs who make millions of dollars, an important thing to keep in mind is that they too are trading their time for money. The only difference being they make hundreds times more per hour invested in their jobs compared to the average working man. When a CEO stops working, he or she also stops getting paid.
Since there is likely a higher probability of getting struck by a lighting over becoming a CEO with a worthwhile paycheck, establishing ventures that yield passive and residual income is how most go-getters get ahead of the game.
Do not mistaken this for not having to put in hard work. In fact, setting up a successful business on the side while keeping a full time job is one of the more challenging tasks I’ve experienced. You will work hard, and you will have to put in countless hours often involving long nights and working weekends. But the rewards are long term in nature and over time more in amount than what you had made had you spent those hours working a job. Think about it as a higher ratio of the return on your time investment.
Understanding how passive and residual income work can also help you understand why your return on investment is so much larger when compared to working a job and getting paid salary.
Passive Income – passive is the opposite of active. So while you are actively engaged in tasks when working in a job, earning passive income does not require you to actively work. The best example I can give you of this is real estate. If you bought a rental property today, you’d have to work at finding the property, closing the deal and putting a tenant in it. But once your tenant has moved in, you will receive rent checks each month on auto pilot. Similarly, if you bought shares of Verizon today, you will be paid dividend income each year.
Residual Income – if you are earning passive income, in most cases chances are that you are also earning that income on a residual basis. Residual means recurring over a period of time. For example, if you established a content rich website today and promoted some affiliate vendors, you will be entitled to commissions generated from all affiliate sales on your website. Likewise, going back to my real estate example, you will receive rent payments on a recurring basis, thus residual in nature. Real estate investing can therefore be both a passive and residual income generating initiative.
I have successfully established several passive and residual streams of income in all but the last type of ventures above. Each one took careful planning, preparation, a lot of time and energy to execute and develop overtime. The rewards have been tremendous to say the least.
It is worth repeating that establishing automated systems that generate passive and residual income do not mean that you don’t have to work for your money. There is work involved in everything in life, especially for something worthwhile achieving, but setting up such systems gives you the freedom to choose what kind of work you want to do and to what extent. In addition, because you financially benefit from these systems on a passive and residual income basis, your return on time invested is significantly higher when compared to a 9 to 5 fixed income job.
And if you don’t think that an extra $100 or $1,000 a month on the side is a big deal, you might want to read why even a little bit of passive income is worth much more than what you think.
The grass is definitely greener on this side of the fence. Or is it? What are your thoughts?
Read my additional thoughts on building passive and residual income streams here.