Passive and Residual Income – What Does It Mean? Why So Good?

• Tweet

• Tweet

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.

The greener side of the fence

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.

Why is the return on investment so much higher?

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.

Some of my preferred passive and residual income business ventures:

• Internet based business
• Real estate investing
• Stock market investing
• Small business investing
• Franchising / Licensing / Royalties

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.

Sunil
Automating

17 Responses to “Passive and Residual Income – What Does It Mean? Why So Good?”

1. Financial Samurai says:

   August 22, 2010 at 8:55 am

   Thanks for making a distinction between passive and residual income. It’s about stages when you make the effort I guess and the long tail.

   I really believe there is very little that can be defined as guaranteed passive income, except for perhaps the money that is earning risk free in your savings or long term CDs.

   The key is to accumulate “THE NUT”, and live off the interest. Everything else has high enough risk for it to go away.

   Reply
2. Financial Samurai says:

   August 22, 2010 at 8:57 am

   BTW Sunil, what is your Twitter account? Doesn’t show up when i click “Tweet this”. Pls shoot me a DM or a Tweet @financialsamura (no i)

   Reply
   • Sunil says:

     August 23, 2010 at 7:45 am

     FS – it is @extramoneyblog

     Strange that it is not showing – I will look into this. The account is relatively new and I am in the process of integrating it with my Facebook fan page which I started this weekend.

     Reply
3. Jerry says:

   February 12, 2012 at 7:07 pm

   Hi,
   Creating a passive income can be difficult at first, but when the income starts coming in…it’s all worth it! Thanks for all your helpful tips.

   Reply
   • Sunil says:

     February 13, 2012 at 7:32 am

     welcome to the blog Jerry. yes that is the beauty of passive income. one can layer different streams over time as well.

     Reply
4. Thomas Smith says:

   January 23, 2013 at 5:35 am

   Great post!

   Reply
5. K.Singh - Internet Marketing Blogger says:

   February 23, 2013 at 12:29 pm

   I have been blogging for just over 3 years now and now I get a steady stream of traffic to my website. I have been thinking of monetising my online presence and your posts have helped a great deal.

   Reply
6. John @ Building Financial Freedom says:

   October 5, 2014 at 1:43 pm

   Earning passive income requires a ton of work in the beginning, but as the income streams start to flow, they build on themselves and form a solid foundation.

   Reply
7. Jerry Wilson says:

   December 10, 2014 at 3:07 pm

   Sunil….. I just now read (and then read again) your most interesting discussion regarding the possibility of entering the ticket brokerage business.

   The idea holds a great deal of interest to me for several reasons. During the past several years (8 plus) I have been intricately involved with a large group

   of individuals in a collective search to build a continuing income stream. In reading your observations regarding the potential for creating considerable profit

   via a ticket brokerage business, it appears that this could well be exactly what we are looking for.

   Sunil, I envision creating a legal entity, (LLC, or C Corp.) through which these activities would be conducted.

   I would be most appreciative if you would assist me in developing this concept. If there is a “cookie cutter” template or a similar methodology available that could be

   used to properly structure the business, that would be of great value.

   Paradoxically speaking, I guess what I would really like to have would be something along the lines of “Ticket Brokerage for Dummies” but at the same time a detailed,

   highly descriptive/explanatory plan to follow.

   Thank you in advance for your consideration of my “plea for help”. I eagerly anticipate your input and suggestions on how to become involved with this exciting opportunity.

   Respectfully,

   Jerry Wilson

   Reply