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Residual Income: The Art of Building Financial Stability

Lifestyle
Published: 12 months ago, Last Updated: 4 months ago
Daniel Brown
Writer: Daniel Brown
Listen minutes

Do you want to gradually build long-term wealth with minimal labor? Then, consider setting up multiple sources of residual income. Residual income allows you to steadily increase your wealth once your revenue streams are established. Setting up a residual income stream has never been easier with the substantial increase in online and freelance opportunities.

If you’re unsure how you can achieve it, this blog will break down the definition of residual income and offer seven ideas to establish a stream of revenue that can provide steady returns for years to come.

What Is Residual Income?

Residual income, also called discretionary income, is the money left over after you’ve paid monthly bills like rent, loans, and utilities. In other words, residual income is the extra cash available for spending after all your obligations are met. Residual income can be accrued through passive and active sources, as well as through your investment portfolio.  

In addition to making extra money, residual income allows you to diversify your revenue sources instead of relying on one source of income. Diversity of income can give your financial portfolio more security. At the same time, you can use your residual income to build your emergency fund and boost your retirement savings. You can also set aside your residual income to afford quality-of-life upgrades like a bigger house, a new car, or a vacation.

Residual Income vs. Active Income vs. Passive Income

Residual, active, and passive income are distinct types of income.

Close up on man pulling out residual income from wallet

Here are the key differences and examples of each:

  • Active income is the money you earn from active labor, like your job, business, and freelancing career.
  • Meanwhile, passive income is the money you earn that requires little to no effort after an initial investment. For example, returns on investments like stocks, bonds, and real estate are considered sources of passive income.
  • Residual income is the amount of money left in your bank account after you have paid all your monthly obligations. Residual income can result from both active and passive sources.

How to Make Residual Income

You can generate a residual income in a variety of ways. The key is to create more money than you spend. Here are six ways to make residual income:

Renting Out Your Property

If you’re a homeowner or own an apartment, you can generate residual income from renting out your property. You can either opt for a long-term rental for at least one year. Conversely, you can also choose a short-term rental option by listing your property on websites and applications like Airbnb and Vrbo .

Both these options come with their pros and cons. For instance, a long-term rental can secure you a steady source of income without constant upkeep. However, you must be more careful when choosing a qualified candidate. Conversely, short-term rentals require less work to qualify applicants. However, you will need to spend more on maintenance and cleaning costs. 

If you’re not a homeowner, there are still ways you can build residual income. You can look for a roommate and split the rent with them. This option can cut down your housing costs and increase residual income.

Investing in Stocks and Bonds

There are many different types of investments you can choose from to increase your residual income for decades, like real estate, stocks, I-bonds, certificates of deposit (CD), mutual funds, treasury inflation-protected securities (TIPS), and T-bonds.

Man investing residual income in stocks

Here are some of the advantages and disadvantages of each investment option:

  • Real estate requires a high initial investment but increases in value over time.
  • The stock market allows you to earn dividends on your investment but can be volatile.
  • I-bonds help protect against inflation because their interest rate changes with inflation. However, there is a limit to how much you can invest, and you may incur a penalty for early withdrawal.
  • CDs offer high-interest rates on the amount you deposit in your account. However, you cannot access your funds for a fixed time and may risk losing the value of your investment during inflation.
  • Mutual funds help diversify your investment portfolio, which may reduce some risks. However, returns on investment may not be guaranteed.
  • TIPS offer inflation protection, but investors might be subject to higher taxes.
  • T-bonds are typically low-risk because they are issued and backed by the U.S. government. T-bonds also pay semi-annual interest until maturity, at which time the face value is paid to the investor. The downside is that T-bonds have long maturity dates, ranging between 10 and 30 years.

Reselling Unused Items

Selling unused items can add to your residual income. For example, if you have electronic devices you rarely use or clothes you don’t wear anymore, consider selling them on online marketplaces like eBay, Poshmark, Mercari, Depop, or Craigslist.

Earning Royalties

A royalty is the amount of money that goes to the creator of a product or a patent. For example, if you have a talent for writing, consider creating an eBook that can be drafted through sites like Amazon Kindle. Most drafting contracts include royalties guaranteeing a partial earning per book sold – generating income for years to come.

Similarly, if you have a talent for producing music, consider uploading your work on online music platforms and streaming services like SoundCloud. Platforms like this enable artists to monetize their work and earn royalties for each track played.

Affiliate Marketing

You can build significant residual income through affiliate marketing partnerships if you are a blogger or have a big following on social media platforms. Affiliate marketing works by promoting a product or service to your followers on blogs, social media accounts, podcasts, or websites. To have a successful stream of revenue as an affiliate marketer, you must provide quality content to your audience and make yourself an expert in your field to gain trust and improve your credibility.

Affiliates earn a commission each time someone purchases a service or product through their affiliate link. As a result, the larger your following, the greater the opportunity for affiliate income.

Income From Passive Business

With the substantial increase in online platforms and opportunities, setting up a passive income stream has never been more accessible. There are many options to choose from. For example, if you are an expert in your field, you can share your knowledge, create your own course, and sell it on platforms like Udemy and Teachable. Once you have designed and uploaded your class, you can enjoy your income from each person who signs up to take your course.

Podcasts are a similar avenue if you want to share your knowledge with others. You can cover various topics like music, food, or finance. In addition, you can record and edit your episodes from the comfort of your home. Once you have a large group of listeners, you can earn money from podcast sponsorships and affiliate marketing.

Podcast hosts recording show

Another passive business income idea includes setting up a YouTube channel. You can generate a few dollars on your videos for every thousand views. So, decide on the theme of your channel, like video game reviews, cooking, traveling, or fitness, and create regular videos to attract and maintain your following. However, maintaining a profitable YouTube channel typically requires upkeep to grow your residual income.

Freelancing

Consider taking on a side hustle, such as freelancing, to earn extra money. Depending on your talents and skills, you can set up your profile on freelancing websites like Fiverr, Upwork, and Flexjobs. Some marketable talents and skills include web design, graphic design, copywriting, data analytics, website development, and social media marketing.

If you choose to take up a freelancing gig, conduct market research to ensure you set a fair price for your services. Browse rates other freelancers charge to get a better idea of where your skills and experience match up. For instance, if you are less experienced, you may want to price your services at a lower rate to attract more clientele. Conversely, if you have extensive experience, you can price your services higher and promote your expertise.

Conclusion

Establishing residual income can boost your finances and family financial planning, help you pay off debt faster, diversify your portfolio, and build your retirement savings. However, it requires an upfront investment of money and hard work. Nonetheless, once your revenue streams are established, it may take minimal effort to maintain. Hence, you can enjoy peace of mind knowing you’re building wealth for the future.

Residual Income FAQ

Here are the most frequently asked questions about residual income:

Is Residual Income Taxable?

Yes, residual income is typically taxable. However, it would depend on the source of the income. If your primary residual income is from a salaried job, it will be taxed with the salary as normal. As long as you are making a certain amount of money from a source, it will likely be factored into your tax return.

How to Calculate Residual Income?

In personal finance, residual income is calculated by subtracting your monthly expenses from your monthly income. The residual income formula is as follows:

Monthly income – Monthly expenses = Residual income

For example, if you earn a salary of $5,000 and your monthly payments like loan repayment, utility bills, and groceries are $1,500, $200, and $500, then your residual income is:

5,000 – (1,500 + $200 + 500) = $2,800

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