There are so many definitions of “residual” income, but what is residual income really? I put quotations because there are many definitions and words used in place of each other, describing earning an income outside of an active job. Residual income is often confused with passive income. Technically, residual income is a form of passive income, but passive income is not always residual income. Passive income is income that is earned with little or no actual effort other than the investment of capital. Residual income is a specific type of passive income where money continues to build after the initial investment and some initial, potential active effort.
There are many ways to create residual income! Every way is dependent on what the investor prefers. Let’s go over a few common types of residual income:
The topics here are just overviews. Each of the topics above, and categories that are not listed but do exist have subcategories of residual income options. As with any investment, you want to first decide what investment is suitable for you. Ultimately, what benefits are you looking for, and what risks are you willing to take on?
When should you start? Now! The more time you have, the more growth you can achieve, and the more you can earn residually over time. This is also known as compounding interest. So, the real question is: why delay your ability to make money off money? Is residual income taxable? Yes, all income is taxable, unless the residual income is being generated from the capital of a tax-free account, like a Roth (withdrawals are tax-free) or Traditional IRA (withdrawals are taxed at your income tax rate at the time of withdrawal). Is Residual Income Important? As we discussed at the beginning of this article, residual income is a type of passive income. Little to no involvement or effort is needed beyond research and completing the required documents. The entire point of investing is to earn money outside of working an active job so that you have the option, or opportunity, to retire. That is why you want to start earning residual income as soon as possible! So, take the challenge to explore the residual and passive income options available. Find investments that require minimal involvement beyond your capital and take the steps to get educated and get started.
Residual income is more than just a financial buzzword; it’s a strategic path to financial freedom. Whether it comes from real estate, dividends, intellectual property, or lending, the goal is the same: to earn income with minimal ongoing effort. The sooner you start, the more time your money has to work for you, especially when paired with tax-advantaged accounts like SDIRAs. While every investment involves some level of risk, the potential to build lasting income streams makes the research and initial effort worthwhile. So, take the first step, explore your options, get informed, and start building your residual income today. Your future self will thank you.