Passive Income vs Residual Income

Passive Income vs Residual Income
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The topic ‘Passive Income vs Residual Income’ is not new, it has left so many people confused. But understanding the difference will help you understand how you earn. 

First, you need to know the definition of income. 

Income is the cash that an individual or business entity receives in exchange for rendering a service or making an investment. There are two types of income: residual income and passive income. 

However, even though these phrases are frequently used interchangeably, they are essentially distinct. While residual income may be passive, passive income isn’t always residual. 

Also, 20 percent of American households get passive income from dividends, interest, or rental properties. This statistics is from the U.S. Census Bureau. The median amount of passive income among such households is $4,200 annually.

However, this article will help you with all you need to know about Passive Income vs Residual Income.

What is Passive Income

Unearned income automatically gained and requires little to no work to achieve or keep is known as passive income. It frequently goes hand in hand with another source of income, like a side business.  

Additionally, when the earner makes little effort to increase the income, it is referred to as progressive passive income. Rental income and any economic operations in which the earner does not meaningfully participate are examples of passive income. 

Taxing authorities in some jurisdictions, such as the Internal Revenue Service in the United States of America, may treat passive income differently from other types of income. Including; wages from regular or contractual employment. 

However, building up passive income frequently takes a lot of time and effort. Even if it could appear that you are “reaping without sowing,”.  

Also, passive income comes with the ability to live without working constantly. Whether one is engaged in meaningful work or not, is a prerequisite for financial independence and early retirement. 

However, the money earned from active income, on the other hand, will stop flowing to a person. Especially if they are living paycheck to paycheck after they stop working. 

Passive income is like an inheritance or the proceeds from selling an asset like a house or stock. it is not necessarily paid out in one single sum. 

Instead, passive income is a form of consistent revenue across time. Permanent income is not the same thing as passive income. 

Some passive income sources, such as property, dividends, debt, or bitcoin revenue, may continue for several years. While others may last for decades or even centuries spanning generations. 

Keep reading the difference between the two types of income in the ‘Passive Income vs Residual Income’ section. 

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Types of Passive Income

Let’s check out some types of passive income streams. This will help you understand more before you get to the Passive Income vs Residual Income’ section.

Below are some types of passive income streams.

Design a course

Make an audio or video course, then sit back and watch the money stream in from the sale of your product. This is a common method for generating passive income. Sites like Udemy, SkillShare, and Coursera allow for the distribution and sale of courses. 

Produce an ebook 

Additionally, writing an ebook can be a good way to benefit from the low cost of publishing. You can even use Amazon’s global distribution to bring your book in front of possibly millions of potential customers. Since they rely on your own skills, e-books can be created for relatively little money. 

Rental revenue 

Renting out real estate is a good strategy to generate passive income. But more effort than individuals anticipate is frequently required. 

Affiliate promotion 

This can be done through a link on their website or social media account. Bloggers, social media “influencers,” or proprietors of websites can promote a third party’s product. 

Furthermore, the most well-known affiliate partner may be Amazon. But other well-known brands include eBay, Awin, and ShareASale. And for companies trying to build a following and advertise their wares, Instagram and TikTok have grown into enormous platforms. 

Flipping retail goods 

Use internet marketplaces like eBay or Amazon to your advantage and resell items you find elsewhere for a discount. People who follow your deals may develop due to your ability to arbitrage the difference between your purchase and sale prices. 

See also: 25 Jobs That Pay $25 an Hour in 2022 | Passive Income Ideas

Online photography sales 

Although selling photography online might not seem like the most apparent way to start a passive income stream. You could be able to grow your efforts if you can sell the same images repeatedly. 

What is Residual Income

Money one continues to earn after completing the work that generates income is known as residual income. Incomes from royalties, rental and real estate revenue, interest and dividend income are residual.  

Also, incomes from the continued sale of consumer items (such as music, digital art, or books), among others, are examples of residual income. 

Furthermore, the management team of a corporation examines the income produced after paying all pertinent capital costs. This is carried out as a residual income measure of corporate success in corporate finance. 

However, in personal finance, residual income can also be referred to as the money that is left over. After all personal obligations and debts have been settled. 

Also, it is the money received after the majority of the job has been performed.

Continue reading to learn how the two types of income differ in the section titled “Passive Income vs Residual Income.”

Types of Residual Income

When you get to the ‘Passive Income vs Residual Income’ section, you will see enough differences between these incomes. But before then, let’s see the types of residual income.

Here are the types of residual income;

Equity Valuation 

Residual income is a way of valuing an economic profits stream. This calculates the intrinsic value of a company’s common stock in equity valuation. 

The book value plus the present value of projected future residual income is how a firm is valued. This is according to the residual income valuation model. 

Additionally, residual income makes an effort to quantify economic profit. This is the profit left over after accounting for all possible sources of capital and deducting opportunity costs. 

Also, net income less a charge for the cost of capital equals residual income. The fee also referred to as the “equity charge,” is calculated by multiplying the equity capital’s value by the cost of equity. It is also known as the required rate of return on equity. 

Furthermore, a company may have a positive net income but a negative residual income due to the opportunity cost of equity. 

Corporate Finance 

The amount of operating profit left over after covering all capital expenses incurred to produce revenues is known as residual income. It is accurate in a corporate context. 

However, the amount of profit over the required rate of return is also known as the company’s net operating income. The performance of a team, department, or business unit is typically evaluated using residual income. 

Furthermore, the residual income is determined as follows: Operating income minus (minimum required return x operating assets). 

Personal Finance 

Residual income is also referred to as disposable income in personal finance. After all monthly debts have been paid, the residual income is calculated. 

As a result, obtaining a loan frequently depends on having residual income. 

Passive Income vs Residual Income(The differences)

There are some parallels between passive and residual income, however, the following are the most significant differences: 

Source 

Passive income and residual income often come from different sources. 

As an illustration, someone who owns rental properties may receive passive income through monthly rent payments. Aside from purchasing and maintaining a property, the person does little to nothing to generate that money. 

Furthermore, a person’s or a business’s source of residual income might also vary. But it typically originates from the industry or field in which they are employed. 

For instance, a CPA (certified public accountant) might develop and market an accounting course. Using their specialized skill set, generates residual income. 

Objective 

Passive and residual income have the same goal—to increase an individual’s or company’s earnings. 

However, individuals, businesses, and investors may seek passive or residual income for various reasons. A person might look for passive or residual income to develop financial security or independence. 

Also, you might develop the income streams to set up an emergency fund for unanticipated expenses. They can be developed to take advantage of early retirement. 

Furthermore, companies and investors may look for passive or residual income. They might need it merely to increase their profits, generate more money, or pay more dividends and other rewards. 

Involvement 

Participation criteria for passive and residual income are frequently different. 

For Passive income vs residual income, involvement is important.

For instance, passive income often demands an upfront investment of some type, such as time, money, or specialized skills. 

For example, a person might pay for a house to rent, put down a deposit, then finance the remaining cost of the house. 

Furthermore, they only need to find tenants and manage their rental property after they secure the house. No additional activity is required. More upkeep may be necessary for residual revenue. 

Additional Differences 

Below are additional differences between passive and residual income;

Risk 

Depending on the source, passive income risks can change. Tenant damage or loan defaults are risks that landlords who rent out their properties face. 

However, if a stock’s price declines dramatically, investors collecting passive income may be exposed to financial hazards. Because residual income is what’s left over after all of your debts have been paid, it normally carries little risk. 

Furthermore, numerous individuals and companies concentrate their residual income on passive income sources. This successfully transforms residual income into passive income and adds new revenue streams. 

See also: 25 Jobs that Pay $30 an Hour in 2022 | Passive Income

Realistic 

Both residual and passive income are typically achievable for the average person. Because it frequently demands a large investment of time, talent, or money, passive income might be harder to develop. 

For instance, purchasing a rental property could reach hundreds of thousands of dollars, maintenance and upkeep included. 

Furthermore, given the variety of ways you might generate residual money, achieving it might be simpler. 

For instance, to increase your residual income, you can put in extra time a few weeks out of every month while concentrating on paying off debt. 

Options 

Under the topic ‘Passive income vs residual income’, this difference is really relevant.

Options for passive and residual income are numerous and frequently have radically different criteria. One might easily generate residual income by reducing household debt and managing their money more effectively. 

Additionally, specialized knowledge, such as investment, may occasionally be necessary for passive income. 

For instance, a person may use cryptocurrencies to generate passive income. But doing so requires knowledge of the options available and how cryptocurrencies operate. 

Stability of finances 

Both passive and residual income can contribute to people achieving financial security and independence. However, the passive income typically has a more significant impact. 

As an illustration, someone might generate $400 in extra income each month by paying down their household debt by $400.

See also: 21 Best Passive Income Apps to Make Money in 2022

Conclusion

The topic ‘Passive income vs residual income’ won’t confuse you anymore since you have seen the differences between both income streams.

Finally, residual income from a profitable passive income source can be used to grow that stream or create a new one. Investing in a passive income venture can be advantageous if you have the money for the start-up costs.

FAQs on Passive Income vs Residual Income

How Do I Generate Residual Income? 

There are a few simple methods for generating residual income. Consider renting out a room or your entire home on the weekends. 
Also, you can consider cashing in on your interests by selling your crafts or photos online. Or researching stocks and peer-to-peer lending options. 

Active Income: What Is It? 

In the form of a salary, hourly compensation, tips, and commissions, your job generates active money. When you have an active income, you work and are compensated for tasks linked to your career or employment. 

How Are Residual and Passive Income Taxed? 

The amount you owe varies on a number of criteria, including whether the income comes from real estate or financial transactions. And passive and residual income is taxed but not at the same rates as active income.

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