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What does passive vs residual income mean?
What are their differences?
In this article, we will break down the notions of Passive Income vs Residual Income so you know all there is to know about it!
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Table of Contents
Passive Income vs Residual Income Overview
What is the difference between passive income and residual income?
Many use the terms passive and residual income interchangeably although they do not mean the same thing.
Passive income is a type of income that you earn passively and without having to actively participate in having the income stream maintained.
On the other hand, residual income refers to the calculation of how much money is left over to an individual or business once all expenses are paid.
If your income is not earned “passively”, then it would not be considered as passive income.
Also, you could earn passive income but if it’s not enough to cover all your expenses, it will not necessarily be residual income.
With regards to residual income, it can be earned in any way (passively or actively).
The meaning of passive vs. residual income can be confused depending on the context when the terms are used.
If you are in the online business industry, you may use the terms passive income and residual income interchangeably to mean money that you make without spending much time or effort (sort of automatically).
If you are in the personal finance space, you’ll use passive income to refer to income that you earn without your material participation or active involvement in generating the income but residual income means how much money you have left over at the end of the month after you pay for your expenses.
To better understand passive income versus residual income, let’s define:
- Passive Income
- Residual Income
Once we define what each of these “income” types mean, we’ll then break down the differences between passive versus residual income.
Passive Income And Residual Income Definition
What does residual income mean?
What about the meaning of passive income?
Let’s first define the notion of income.
What Is Income
Income refers to money received by an individual or a company in exchange for their products and services, or as a return on their investment.
For example, if you work 40 hours a week on a job, you will earn your wages representing a source of income to you as an individual.
Another example is a company selling physical goods online through an e-commerce platform.
The money received by the company for delivering the goods to its clients represents a source of income to the company.
There are different types of income that can be earned such as dividend income, interest income, rental income, and so on.
What Is Passive Income
Passive income is a type of income that is earned (as the name suggests) passively.
In other words, the income is earned with little to no participation of the beneficiary of the income.
For example, if you invest in a real estate property giving you rental income, your rental income is considered passive income.
The reason why rental income is passive income is that it does not depend on how much you work or your active involvement for the income to be generated.
With rental income, you earn the income with the mere passing of time.
The beauty of passive income (and that’s one of the core focus of my blog here) is that you can build multiple streams of passive income and have them generate a steady stream of cash flow.
Let’s take another example.
I’m an expert in generating passive income.
Over the years, I created different types of passive income streams where I earn money without having to spend a lot of time and effort to generate the cash flow.
I earn passive income through display advertising, affiliate marketing, online courses, digital products, investment in the stock market, and real estate rental properties.
With passive income, you are not trading your time for money.
What Is Residual Income
Now, what is the definition of residual income?
Residual income is how much money you have leftover once you deduct all your costs and expenses from your various income sources.
Consider “residual income” to be like a calculation of what is left in your bank account at the end of the month once you pay all your bills.
For example, if you currently earn wages of $2,500 per month, pay rent for $800, spend $1,000 on all the other necessary things you need to live, you’ve spent $1,800 out of $2,500.
At the end of the month, you are left with $700 in residual income.
Your residual income is the money you have the ability to use at your discretion (you could save the money, invest it, spend it on discretionary goods etc).
Let’s look at another example.
I operate a portfolio of blogs and websites where I generate income from multiple sources.
To operate my online businesses, I have to pay for web hosting services, online backup systems, pay monthly subscriptions to keyword research tools, email marketing software, and so on.
At the end of the month, once I deduct all my expenses from my income, whatever is left is my company’s residual income.
Difference Between Passive Income vs Residual Income
There appears to be a lot of confusion about the meaning of residual income and passive income.
One reason why there’s so much confusion is that the terms “passive” and “residual” income do not necessarily mean the same thing depending on the context (or industry in which the term is used).
Let’s look at the differences between passive income versus residuals in online business and in finance.
In Online Business
In the online business world (where I operate), the terms “passive income” and “residual income” pretty much mean the same thing.
When you are able to generate an income online without having to spend much of your time (or energy) to produce the income, you are making residuals or passive income.
For example, if you start a blog where you sell digital downloads, you can earn passive income every time someone clicks on your article and downloads the digital product.
You put in some time, in the beginning, to write your blog article and create your digital product, but when hundreds and thousands of people start downloading it, you earn more and more money without spending any additional time (or minimal effort to maintain your website).
For example, you can create a blog and use affiliate links to promote another business’s products and services to earn a commission.
You can create an online course where your audience pays to view.
Your blog may have premium content that you reserve for those paying you a monthly subscription fee.
These are all passive methods that you can earn money online.
In the finance world, there is a marked difference between passive and residual revenues.
In personal finance, passive income means that you earn an income without your material participation (same meaning as in the online business industry).
Residual income, however, means how much money you have left at the end of the month (or year) when you pay for all your living expenses.
Residual income is the discretionary income that you are free to spend on what you like.
In the corporate world, passive means the same thing as in the personal finance world (money earned passively).
Residual income refers to a company’s net operating profit or the profit it expected exceeding its required rate of return.
Typically, a company will use its residual income to reinvest in the business by making capital investments, research and development, fund an acquisition, or pay dividends to its shareholders.
What Are The Differences
What are the differences between passive income and residual income?
Here are the characteristics of passive income:
- It is earned only passively
- Passive income can be residual income
- You do not exchange your time for money
- You do not materially participate in producing the income
- You can create multiple streams of passive income
- It takes time and money to create the passive stream of income but much less to maintain it
Here are the characteristics of residual income:
- You can earn it actively or passively
- Residual income is not necessarily always generated from passive income
- Residual income is the “calculation” of how much money is leftover in a given period
- In personal finance, it’s how much money you have left at the end of the month (discretionary income)
- In finance, it’s your company’s net operating profits or the profits left to a company at the end of an accounting period
Residual Income vs Passive Income Takeaways
So, there you have it folks.
We’ve looked at the difference in what residual vs. passive income mean.
It’s important to know the differences between passive and residual income so you are in a better position to express your needs when you’re operating in the online business, within the personal finance space, or corporate world.
Why You Should Join My Passive Income Blog
It’s been great having you on my blog.
Just so you know a little about me!
On this blog, I focus on generating passive income in order to build wealth over time.
Over the years, I have built a portfolio of passive income sources generating me a constant, continuous, and reliable source of cash flow every month (it is awesome!!).
I made a lot of mistakes on the way and learned a lot.
Now, my mission is to teach you my secrets, guide you, and show you how to make passive income for yourself.
I don’t offer a get-rick-fast scheme or I will not make you a millionaire overnight.
However, what I can do is to provide you real and actionable strategies that you (anyone) can implement on any scale (large or small) to make money passively.
If you are willing to dedicate yourself, work hard, and make sacrifices, I can help you change your life around.
I only focus on tried and true methods for making money and they take time, patience, perseverance, and a lot of hard work.
If you are looking for financial freedom, make more money, or learn how to earn cash flow from awesome passive income sources, as your first step, sign up for my Passive Income Newsletter.
When you sign up, I will share with you my exclusive content on passive income, tell you about the tools I use, strategies that I’ve used, what successful entrepreneurs do to make piles of money, and most importantly my actionable tips to get you started!
Are you ready to live life on your own terms?
Can you make the commitment today?
If you are ready and willing to commit yourself, come with me and let’s go on a wonderful journey together…
With that being said, let’s head right back to our main topic!
Passive Income vs Residual Income
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