How to Generate Residual Income

November 22, 2022

What does residual income mean and how do you generate residual income to make more money outside of your normal day-to-day job?

There are different kinds of sources of income. Different types of income come with different pros and cons. Learning about different types of income, like passive income, residual income, and active income, can help you grow and strengthen your personal finances.

Learn more about residual income, what it means, and how you can use it yourself to generate income without lifting a finger. 

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What is Residual Income?

Residual income is similar to passive income, but they are not exactly the same. Residual income is a form of income between passive and active income. It involves some form of initial work, and then profits continue for at least some time after that initial work is completed. 

Residual Income Definition

Some examples of residual income include things like royalties or even rental income. This is where the line between residual income vs passive income begins to blur. Some forms of residual income are often grouped with passive income because once the initial work is done, these earnings just come in every so often on their own. 

What is Passive Income? 

Passive and active income are ways of referring to a type of income. Passive income is earned without physical work, while active income is earned with physical work. 

So passive income is when you earn money without having to do traditional work to earn that money.

Forms of passive income include things like money you get from the renter's living in your rental properties or money you earn as you make good investments in the stock market.

This type of income has several unique differences to remember when dealing with passive income. This source of income is still subject to income tax, though there are some differences to remember when filing your tax return and including passive income. 

Residual Income vs Passive Income

Residual income and passive income often intertwine. Some forms of passive income are really residual income because they do involve some initial work to get started. For example, you could consider rental payments passive income, but if you had to work to buy those rental properties, then they might better fall under residual income instead.

Truly passive income will involve no work. It is income that an individual or an organization is able to earn passively, meaning without effort. So many examples of passive income that do involve some work, or some initial work to get started, can also be referred to as residual income. 

Ideas for Passive Income

There are a lot of ways to start earning passive income and increase your financial portfolio. Some of the passive income ideas below actually do involve some residual income. But all of them provide the perks of working less and earning more. 

Are Rental Properties Passive Income?

Sometimes rental properties are not truly passive income. If you are a real estate professional, making your rental properties a part of your job, then this would actually be active income.

Another instance where rental properties do not count as passive income is if you are doing something called "self-renting" where you rent a workspace to yourself. This income is then also a part of your job and considered active income. 

But if you're able to set up rental properties that don't require daily time and work on your part, then this can be a great way to provide housing and earn extra income too.

Are Investments Passive Income?

Investments are another example that can often be defined as residual or even active income. In fact, the Internal Revenue Service (IRS) officially classifies investment earnings as portfolio income. So some people might refer to investments as passive income because you can earn extra income without doing a lot of work, but just remember when you're filing taxes that this type of income technically falls under portfolio income and not passive income. 

Are Business Investments Passive Income?

So what does count as passive income? According to the URS, there are two passive income examples that count as passive income on your tax records—income from rental properties and businesses that you don't actively participate in.

This means that apart from owning rental properties, investing in a business is the second-best way to start earning real passive income. 

By investing in a business, you can earn money as the business earns money. But the only "work" you really had to put into the business was investing your money. This is a great way to not only support a business you believe in, but grow your financial portfolio and increase your personal wealth. 

Passive income vs Residual Income Venn Diagram

Ways to Make Passive Income

Would you like to know how to create passive income streams? Who wouldn't! This type of income allows you to make income without putting in the hours and hours of work that traditional earned income requires. Not only does this give you more free time, but it grows your finances and sets you up for greater financial stability. 

The first thing you'll need to do before investing in passive income is do some research. Research the different examples of passive income you could invest in and weigh the pros and cons of each. Once you've thoroughly weighed all your options, pick your sources of passive income and get started! 

Invest in Dividend Stocks

You could invest in dividend stocks. Dividend stocks are a way to become a business investor. Dividend stocks are a type of investment that gives stockholders a portion of the company's profits on a regular basis, like once a quarter for example. There is an initial investment when you buy the stocks, but then there is the potential to remake that money and more as the business does well.

Invest in Financial Assets

Build up your financial asset portfolio when you buy things like rental properties. If you own any number of rental properties, then you can start earning monthly income from tenants. If you invest in a rental property that already has a management system, then you can make this type of passive income even more hands-free.

High-Yield Savings Accounts

A high-yield savings account is a special type of savings account that grows. It uses an interest rate to grow the initial deposit amount. This interest accumulates slowly, so you won't earn as much as you would investing in stocks or businesses, but creating a high-yield savings account is a great way to keep your savings safe and help them grow. 

Royalties, Copyrights, and Intellectual Property 

Setting yourself up with royalties, copyrights, and other types of intellectual property are another great way to set yourself up with passive income. You may need to do some initial work to create something, but once you have your creation copyrighted and out in the world, you can earn money on the sales of that product for years to come. 

In Conclusion,

There is more than one way to earn money and increase wealth. Passive income is a great way to do that without taking up even more of your precious time and energy. Get started on creating passive income flow today and see how your finances can grow.