Residual or Passive Income - What it is and How to Get It

Residual income (“passive,” “recurring,” or “leveraged”) is by far the best type of income available to most people. Once you set the wheels of residual income in motion, you can continue to earn money day after day after day, without much, or sometimes any, additional effort. It can be dependable income that keeps coming in month after month, year after year. Residual income is usually based on the previous activity but sometimes needs nurturing to keep it coming.

One of the ideas that make residual income so powerful is that residual income is not directly proportional to the number of hours invested or some products/services sold. It is income that continues to be generated after the initial effort has been expended. With residual income, 40 hours of work can garner much more than 40 hours of payment.

Understanding the idea of residual income is easy if you consider the word “residue.” Residue refers to something left behind as a result of something else. Residual income is left after the work is finished and keeps repeatedly paying for the work you have previously done, even if you stop working on that project. Very few jobs have an option for residual income.

In general, teachers don’t have it. Neither do lawyers, doctors, firefighters, politicians, Indian chiefs, business executives, or accountants. At least 80 % of people have jobs that offer no chance for residual income. Many of these people who hold traditional 9-5, M-F jobs can not expect or even plan to continue receiving an income from their employer should they ever leave their position. They (and most likely, you) have what most people have – linear income.

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Linear Income

Linear income (“Transaction Income,” Fixed Income,” or “Earned Income”) is basically a one-time compensation or payment in the form of a fee, wage, commission, or salary. Linear income is directly proportional to the number of hours being invested or the number of products/services sold. You do something once, and you also get paid only once. It is probably the type of income you receive from your job right now.

The vast majority of people work each day and earn linear income. They work for 40 hours a week and get paid for 40 hours. Some people put in 50-60 hours of work and still only get paid for 40 hours, but that is a different issue. For most people, their effort is directly proportional to the income their employer pays out. This is not bad, but it is not great either.

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The problem with linear income is that if your work effort drops or stops due to sickness, newborn, lay off, etc., your income drops as well (after your vacation/sick leave is used up). You may have been the star performer in your office the month before, but that will not matter. Your current check will only reflect your most recent effort. With linear income, No work = no money. Residual income allows you to change the normal flow and make money even when you are not working.

Now that we know the difference between residual and linear income let’s look at the benefits of residual income.

Benefits of Residual Income

Many of the benefits of residual income are obvious, but I’ll run through them to make sure they are all clear.

1. You can make an initial effort to get a residual income stream started, then do minimal work (or virtually none) thereafter, resulting in earning more money for little to no effort.

2. You can have the freedom to choose when and where you wish to work. Keep your favorite pajamas on all day if you wish.

3. You can worry less about getting sick or being disabled and unable to work. Expectant mothers can create a residual income and not worry about missing time from work after delivery.

4. You can have the ever-so-fun feeling of earning income even when you are not at work. It is a great feeling!

5. You have the ability to increase your income whenever you want by working and creating additional income streams.

6. You can have all the usual benefits of working from home.

7. You can have more free time to spend time with your family, friends or go on vacation or create more income streams.

8. You can do it in your spare time if you choose. Don’t want to work full time? No problem!

9. You can prepare for future expenses easier. – Ex. Know you want to buy a car in 12 months? Instead of saving your current income to pay for it, you can create a new income stream that will cover the car payments. Same for college or retirement.

Drawbacks of Residual Income

I’m going, being honest with you. Nothing in this life is perfect. Sorry if that bursts your bubble.

Creating your first residual income stream is often difficult as the payoff can be uncertain and often far away. For all its disadvantages, linear income is predictable, consistent, and usually comes 1-2 weeks after you finish your work. Residual income will require dedication in the face of unknowns. This is why most people never bother to develop a residual income stream. They don’t reach their expectations in time, so they quit before they even really begin. Others have estimated that this usually happens somewhere between 1 and 12 months.