Why Passive and Residual Income are Important

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Most people have at least one income stream – that’s their job. They go to work, punch a clock, and get paid. But, if they don’t show up, they don’t get paid. If they quit their job, or are otherwise laid off, they don’t get paid. If you’re an independent contractor and don’t receive benefits, when you get sick or take vacation, you don’t get paid either.

This is why I am a strong advocate for multiple sources of income, and especially adamant that one of those sources of income be passive or residual.

As a side note: in the investing world, “Residual Income” is defined as the income left over from expenses. So, if you make $3000/month, and have $2000 in expenses, you have $1000 in “residual” or “left over” income. However, in the business and online world, we define residual and passive income as being somewhat similar as being the type of income that you make through little to no ongoing effort on your part. Key words here being “ongoing effort.”

I tend to think of residual income as the income you make after you have invested time on a business, product, or service. For example: setting up a website and selling ads or memberships, creating and selling ebooks, webinars, or other informational products, licensing your ideas, creating music, photography, or other artistic products, and then selling and earning income from the sales of those products. You do the work once, and then get paid over and over and over for it.

Passive income, on the other hand, is income that you make after you have invested money on a business, product, or service. For example: Putting money into the stock market, or even earning interest on your savings or money market accounts, investing in a rental property that is managed by a property management company, or starting a franchise. All of these produce income that you don’t necessarily need to work for, but require your initial monetary investment to get started.

Multi-level marketing companies like Avon, Tupperware, Discovery Toys, etc., are a mix of both, because you have to put both time and money into the business before you get anything out of it. But, once you have recruited others to work the business as well, you can earn passive, residual income off of their efforts. However, should they leave the business, your income stream from them may dry up!

It is possible to earn residual or passive income – and it is well worth the effort needed to set up. The formula for becoming financially free is to have your passive (or residual) income surpass your monthly expenses. Once you can cover your monthly expenses with income that requires little to no effort on your part, you can spend your time doing anything other than punching a clock!