Most people believe that money is created through active income. They rarely think about passive income or even residual income as a source to generate wealth or financial freedom.
Wealth is thought of as being reserved for those that have the means to create and make money. These may be the rich and famous or even those that have inherited money. Why can’t we be part of those people that are wealthy? What rules restrict us from being able to make this wealth for ourselves and our families?
When exploring the means of creating wealth without using active income, we come across two types. There is passive income, and there is residual income. They both act very similarly, but as we talk about finance, it is better to think of the residual income.
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Residual income is an income that can be passive. The calculation determines how much profit or excess income is available after all expenses are paid off.
It is the leftover money we have after we have paid off any personal or business debt.
Most people trade time for money, but we create income streams without trading in more time with the residual income. These income streams are passive and allow us to keep our time without spending it to make more money.
Residual income and passive income seem to be used interchangeably within the internet world. You go to Google to search, and some posts and articles come up with passive income ideas.
Let’s get these two things straight. The money that comes from all that work is passive income. Passive income comes from doing work like building a blog, writing posts, and using it to sell affiliates and ads if I were to buy rental properties that create massive amounts of cash flow, once all the work is done and the money comes in passively. You have now done all the work, and the income comes afterward.
We often think about active income. Work is done, and therefore, we get paid for the work. The work is done with the passive income, but the money keeps coming in. If you write one blog post and keep making money from it years later.
Residual income is the same, but you calculate how much profit you get from the passive income. With the blog you are writing, there are costs such as hosting, plugins, a theme, and even a mastermind group.
The rental property would have been bought with money and would have expenses like management fees, taxes, rehabbing the property, and maintenance.
In the end, you take the revenue you have created and subtract it from the involved costs. That is your residual income.
When talking about residual income, we come across two different types. There are personal and corporate.
In personal finance, residual income is the disposable income. You can calculate your residual income every month by taking what is left over after paying all debts. This debt-to-income ratio is critical when looking to get loans from banks and lending services.
Banks and lenders want to see how much you keep determining if it is worth loaning you money. The debt-to-income ratio is significant to these lenders.
Lenders generally do not want to see a debt to income ratio over 43%. It is not good for business. So, the lower the ratio, the more likely a bank is willing to lend money to an individual.
Corporate residual income is a bit different from personal. Corporations use residual income to assess their performance. That is the profit after paying all costs they have incurred to generate revenues. That is the net operating income. Operating margin represents how efficient the company is or is not.
They use residual income to evaluate the effectiveness of their investments, their teams, and their departments. It is a good measurement to see the health of a company.
Now we know about residual income. It is time to make some. Here are 10 ways you can create residual income for yourself.
Owning real estate can be a great way to generate monthly income. Real estate is also a good way to build wealth. You can purchase a single-family home, duplex, or even apartment building. The great thing about owning real estate is that there will be a good cash flow coming in every month. Real estate investing can be a high paying job.
There will be additional expenses, but the work is relatively minimal. The rental payments can help pay off the mortgage, taxes, and repairs while you save the rest.
You can manage the property yourself or even hire a property manager to help you with the property. With a property manager, you can put some of your time into other valuable items, but you can manage the property yourself to obtain more income. If you become a landlord it is vital to understand what a landlord cannot do.
2. Vacation Rentals or Short-term Rentals
Airbnb has become huge over the last many years. If you have a free room in your house, you can rent that out. It is an excellent opportunity to make extra money without having much work to put in it.
My friends had a big house with plenty of rooms to rent out to people for weekends. It was an excellent way for them to create extra money without extra work to create active income.
You can also have a place in popular vacation spots like on the beach or the mountains to rent out short-term to use VRBO or other sites to make some good side income.
Investing in the stock market is one of the simplest ways to create a passive income stream. Have you heard of index funds? They are one of the simplest ways to build wealth with your money in the stock market. You can continue to buy these index funds and allow compounding interest to really grow your money. The same holds true for dividend growth investing. You can build in a passive income stream that doubles every 10 years or so if you start at a 3% dividend yield and have about mid-single-digit dividend growth.
You can buy these funds with Vanguard or Fidelity. It can really make creating wealth simpler and easier for the average person.
It does take patience to allow your money to grow. If you can be patient and continue to stay invested, you will wake up in 10, 20, or 30 years with a massive portfolio. This is one of my favorite ways to create residual and passive income.
If you want to invest in real estate without having the responsibility of being a landlord, you could invest in REITs.
REITs are real estate investment trusts. These are companies that will buy up real estate and use your money to help them do it. You will get dividends from the residual income that the company makes off its properties. It is important to understand the tax implications of owning REITs. The dividends are not qualified and thus are taxed at the ordinary income rates.
This is an easy way to create some residual income. You invest in some REITs and reap the profits at the end of each month.
Starting a blog can be challenging work that takes time and money to make things happen. If you want to capitalize on something with a high ROI and high operating margins, creating a blog can be a way you can do it.
It takes little money to start. You need to have a good niche, a lot of persistence, patience, and start to write. Once you get started, you can build a following, and soon enough, as the blog grows, your income can grow along with it.
Many people have started blogs and created great avenues of income through these blogs. It takes time and patience, but you can dominate the internet with your content if you find a good niche.
If you enjoy talking with people or sharing ideas, you can start a podcast. Many podcasts pop up all over the place, but it is a newer field compared to the blogging world and offers many opportunities.
With a niche, you can help educate the world with your skills and expertise. The great thing about running a podcast is once you record, edit, and publish, you can wait as people download the episode.
In making money with podcasts, many people will go to Patreon and set up an account. That is a way for subscribers to help sponsor their favorite content. As the content creator keeps creating, his audience will continue to grow, and other sponsors will jump on to help fund and make the podcast profitable.
Writing a book is a great way to build something and allow the income to come in after all the work. It can be as easy as writing it and publishing it as an eBook through Gumroad or even using Amazon’s KDP program to create the book. I have an eBook entitled, “10 Forever Dividend Growth Stocks.”
If you are knowledgeable about a particular subject, you need to put that pen on the paper and write something that will help bring value to someone’s life. Something helpful will be worth it to people that will buy it.
This book can be an asset that continues to pay you days, months, and years after you have written it. It is a perfect way to start some residual income.
Creating a course is much like writing a book. There are many skills out there that people would be willing to learn if they had a good course that can teach them.
Right now, the internet is full of courses to help improve your life, create skills, and help you even manage your money. If you can teach someone, then building a course is a great way to generate some good residual income.
If you have some technical skills, you can use those skills to be an app. That can be an app about anything that people will find value in. For instance, you can have a finance app, a recipe app, or even a fantastic travel app.
Once you build the app, you are ready to go to make some money. Not all of us can create apps.
You can visit sites like Upwork and hire some people to code and create an app for you. If you have an idea, you can make it work.
If you are good at creating, you can create notebooks and other digital products. You can sell these on Amazon, but you can also sell these on Etsy. Create a digital product, then add a download button, and you have it set.
You make the item once and can continue to sell many more of those specific items. That can be as easy as creating cards, wall prints, inspirational quotes, or even sell digital versions of your artwork.
Residual income is a way to create much wealth. As you can make most of this money through passive income sources, you can generate more income. This is a massive step towards achieving financial freedom. As you think about it, it is not just about making passive income but creating enough income not to need an active job. Residual income can also be used to help you pay down debt, build an emergency fund, and in general improve your financial fitness.
Remember that residual income is the income and profit after all expenses are paid off. With these 10 ways, you have the tools to go out and make your residual income streams.
This article by Steve of The Frugal Expat blog originally appeared on Savoteur and has been republished with permission.
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.