It seems that, recently, residual income has gained a lot of attention in mainstream media. Or, at least, it's becoming more common in popular culture. What millennial, freelancer hustler, or solopreneur isn’t wondering what this type of income is?
People are starting to realize that residual income can build wealth exponentially more quickly than regular income. It's like gaining compound interest over time in that it basically works passively in your favor without you having to do, well, much of anything.
This means that, if you’re smart about finding the right residual income ideas, you’ll be able to develop your own little money ecosystem where you’re never sending out more than what’s coming in. Read on to learn more about how to use residual income as a way to grow and compound your wealth.
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What is Residual Income?
This is income you earn on something after you complete the work. In this context, it’s passive income basically, because you’re already done the work to complete a project or offer a service and then, once your work is done, you earn royalties, dividends, etc. for a specific (sometimes undetermined) amount of time afterward.
What’s cool, though, is that if your residual income covers your monthly bills then it builds wealth faster than if you only had regular salaried income to depend on, because residual income allows you to build up bigger amounts of savings faster.
Imagine, for example, that you earn $3,500 a month from your salaried job. Great! Now, imagine spending 100 hours on a project that helps you earn that same amount every single month with zero work on your part after the initial 100 hours are completed. That’s the power of earning this type of income.
Now, it’s also important to note that residual income isn’t always passive income; they’re not exactly the same thing. Basically, for example, you could earn residual income from leftover funds you’ve got from earning active income. You can then use that to support a passive income earning endeavor.
Every income project and idea that you choose to employ can help build residual income. However, different residual income ideas will lead to residual income growth at different rates. The residual income growth rate depends on the industry and the type of work you do.
Recap: Residual income is a type of income you receive after completing work. This can include real estate income, interest and dividend income, royalties, and incoming, ongoing income from selling consumer goods.
How to Calculate Your Residual Income
Wondering how to calculate your residual income? You'll need to make sure you actually have this type of income first. Investopedia explains this really well by breaking down the differences between passive income vs. residual income.
“Passive income is money earned from an enterprise that has little or no ongoing effort involved. Residual income is not exactly a type of income. Rather, it's a calculation determining how much discretionary money an individual or entity can spend after paying their bills and meeting their financial obligations.”
So, before figuring out how to calculate residual income, we believe it’s important that you understand that while residual income can be a form of passive income, the two terms aren’t totally interchangeable. Now that you’ve understood that...how do you calculate your residual income?
Well, in the corporate world, residual income is calculated after paying all costs of capital. In personal finance, you can figure it out by either:
- Calculating the total income received after work has been completed on a certain project, or
- Calculating the income left over after you’ve paid off all your debts and other obligations
Really, for personal income purposes, and because we’re guessing you reached this article because you’re interested in creating multiple streams of income for yourself, we’re gonna talk more about the first calculation.
However, for the second calculation and definition, it’s important to note that having a high ratio of residual income can really just mean you’ve got a lot of disposable income. When applying for a loan, this is useful. Lenders will look to see that you’ve got enough residual (i.e. disposable) income to use so that you can cover monthly loan payments.
How to Build Wealth Through Residual Income
What’s cool about this type of income is that, as mentioned above, it’s recurring income for work that’s already been completed. So, the idea is that you’re investing time and perhaps money upfront into something that will, eventually, earn you money without you having to do really anything at all.
This makes it a fantastic way to build wealth as it doesn’t require time or money from you long-term. This frees you up to simply enjoy the cash coming in. It also frees you up so that you can invest in other streams of income that will turn around and earn you money passively. However, we can’t deny that some forms of building residual wealth are better than others.
Check out some of our favorite ways to build wealth through residual income below.
Invest in Short-Term Rentals
Sites like Airbnb allow people to monetize their homes or spare space. You simply rent it out as a vacation spot or place of business. Airbnb hosts make, on average, just over $920 per month. You'll have to factor in fees and cleaning costs. But, that's not a bad gig if you're able to be pretty hands-off with it.
To make investing in short-term rentals work for you as a form of residual income, we suggest being smart about where you're purchasing property (if you don't already own) and the type of property you're buying. Properties in bigger cities obviously generate more money as you can rent them out for more. Be sure to invest in great photos upfront as well so that your listing looks appealing.
Earn Dividend Payments
Dividends aren't just a great income source, they're also often the primary goal of many investors. You can get paid residual income for stock ownership if your company pays its shareholders a portion of the earnings every quarter that it collects from business activities.
How do you invest in a way that helps you earn dividend payments? Try to invest in a company that's already paying residual income dividends.This residual income is a form of passive residual cash flow, so be sure to take a look at that metric when learning how to invest.
If you're tech-savvy and want to earn residual income monthly from recurring online payments, look into affiliate marketing. What is affiliate marketing? It's when you promote other people's products and get paid residuals based on your sales volume.
Who offers residual income affiliate programs? If you're looking for residual income because you just don't have enough money to pay the bills, look into affiliate marketing. It's very low-risk in that it only requires a website and a basic knowledge of how to market products online.
Affiliate marketers usually start out by building a blog or eCommerce store. Then, they sign up for programs such as the Amazon Associates Program. Once the website is set up and you've been able to create content that generates traffic, you can then sit back and enjoy recurring monthly payments from those affiliate programs.
Invest in Yourself Long-Term
Sure, you can get rich from making residual income. Tons of affiliate marketers and other digital gurus are doing it. However, it’s often a long-term game. Investing your time and money in high-quality projects that you believe have the long-term ability to generate this type of income is key.
This means that if you’re going to invest in a short-term rental property, invest in one in an area of the country that’s expected to boom in the coming years. Or, invest in upgrades that will help you see long-term returns. Likewise, if your plan is to invest in a company that pays out dividend payments, be sure to do your research up front.
Or, you can just learn how to invest from the pros. Put your time and effort into building long-term wealth for yourself that way. Not sure where to start? That’s what we’re here for. We’ll teach you how to invest by giving you guidance and tips from an expert investment pro.
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