What Is Residual Income? Definition and How to Earn It this 2020

... Credit :
Jane Taylor in Business & Finance

Last updated: 21 January 2020, 07:33 GMT

Residual income is a term that has slightly different meanings depending on the context. It has a specific meaning when used in the finance and management accounting fields.

It has a different meaning when referring to personal investment opportunities, which are sometimes referred to as passive income. We will explain these different types of residual income here. And we will also help you to identify some ways that you can increase your own residual income.

Residual Income in Finance

In finance, residual income is the amount of net income that exceeds the expected minimum rate of return. Sometimes, companies use the residual return to assess their performance.  

Residual income also refers to the net income minus all debts and costs related to generating this income. It can help determine whether an investment will be profitable or not after deducting all of the related costs.

Residual Income in Managerial Accounting

In managerial accounting, residual income refers to a measurement of whether a business will be successful and valuable or not. Residual or net income is calculated by subtracting operating income from the cost of capital multiplied by the operating assets.

The formula is this: operating income - (operating assets x cost of capital).

Therefore, if a business needs more assets, it won’t be as profitable as the one that requires fewer assets. Calculating residual income can be a tool to measure companies’ performance and track improvement in exceeding the required return. It is also used alongside the return of investment (ROI) to assess the company’s performance.

Residual Income in Personal Finance

In personal finance, the term residual income might refer to a few different scenarios.

It can to the amount of income a person earns after paying their debts. This kind of residual income is measured on a monthly basis. Banks and lending institutions use it to determine how much money they can lend a person.

On the other hand, residual income can also refer to a completely different concept. This notion is also called passive income. Passive income can be the amount of money you earn from a one-time investment, such as buying bonds or stocks.

In addition, let’s say you composed a music track, wrote a book, or produced a video or a movie. Whenever someone uses this product or buys it, you get paid.

If you rent out a home that you own, the rental income is also considered to be residual income.

There are many benefits to residual income. Many of us have retirement plans or personal savings accounts. But these might not be the best options for long-term investment.

Retirement plans usually just allow you to barely get by. And the value of the funds can decrease over time, especially if the economy is unstable. Savings accounts don't grow fast, and if you need to use the money for an emergency, your savings are then gone.

Residual income can provide better financial security than these traditional schemes. If you invest enough money or time in them, they can provide a high return.

Residual income will usually require you to invest a lot of time and effort at the beginning. You should learn about the various sources and approaches available for making money in the long term. You should also consider creating more than one stream to generate residual income.

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Ways to Generate Residual Income

There are many streams for generating income. However, to guarantee success you need to pick those that you will be able to excel at. We will provide you with some of the most lucrative ways of generating residual income.

Real Estate

You can invest in real estate in the traditional way. You can buy a house or an apartment and rent it out. The rental money you receive each month will be your residual income. The benefits include relatively easy money, and the value of your property will increase over time.

However, the downside can sometimes be the hassle of dealing with tenants. In addition, you will have to manage the maintenance of the property. You will also need to lay out a huge sum of money to buy the property.

What if you don’t have the money to buy a house or an apartment and you still want to invest in real estate? There are other options that you can take advantage of.

Fundrise is an opportunity you can use if you want a passive income from real estate with a small amount of investment. The platform enables you to pay a minimum of $500 into crowdfunded real estate investments.

One of the benefits of Fundrise is that you can open an account very easily. It’s inexpensive to start a portfolio with the company, and you don’t have to be an accredited investor. You will also avoid dealing with tenants and managing your property’s maintenance.

You will pay normal taxes for any money you gain from the platform, unlike the reduced taxes on dividends. You can’t withdraw your money easily since it isn’t liquid. Also, the interest isn’t guaranteed because it depends on the real estate market.

There are also other real estate platforms you might consider. There is a platform called RealtyShares which is similar to Fundrise with a few key differences. It’s more expensive, and you need to be an accredited investor to open a portfolio.

Another very popular option in real estate is Airbnb. If you live in a college town or near tourist attractions, you can rent out a room in your house. This option can be lucrative, and you will make lots of friends of different nationalities.

Stocks and Bonds

Investing in the stock market is the preferable route for many investors. This can generate a serious residual income in the long run.

This investment income isn’t guaranteed and there is a major factor of risk. However, if you invest with a large stable firm they may guarantee your interest rate to some extent. Also, you often pay fewer taxes on the money you make from bonds and stocks.

Affiliate Marketing

Affiliate marketing is a new trend if you’re looking for an online source of residual income. It enables you to receive a commission whenever someone buys a product because of you.

For example, the Amazon affiliate marketing program enables you to create a personalized link for many products that they sell. If someone orders this product through your link, you will get a commission.

This method is very easy to start and operate. You can be sitting at home relaxing while money is pouring into your bank account to generate revenue.

However, it might take some effort and time in the beginning. This is because you need to encourage people to use your links to buy products. You will need some online marketing channels to promote these products.

Some of these channels can be:


Blogs can be a very efficient method to promote products and get people to buy through your links. If you enjoy writing, you can start blogging very easily. You can also start a blog for free in very little time.

You can start a blog if you are interested in certain products and if you have good background knowledge about it. If you’re interested in cameras, you can write reviews about cameras and post your personalized links. It’s effective in promoting your links but it will take time to bring readers and traffic to your blog.

You can also post ads on your blogs to generate revenue. When you have many readers, companies will be interested in advertising on your site. This can be easier than affiliate marketing, but it might take some time to increase traffic.

Social Media

Social media platforms can be useful for promoting the products you’re selling. They are great tools for reaching a large number of prospective buyers. If you employ this method strategically, it will enable you to sell many products.

One of the most important social media platforms is Facebook. You can create a Facebook group or page to gather people who are interested in cameras. You can invite people to share opinions and information.

Once you create traffic on your page, you can start posting your personalized Amazon links. You can also use Facebook ads to reach your targeted audience. You can choose who will receive your ads in their personal feed.

If you’re comfortable in front of the camera, you can create videos on YouTube. You can create a channel and start your own broadcast.

You will need to post content relevant to the products you’re selling. You can then post your personalized links in the description section. This will probably reach more people than blogs since many people enjoy watching videos more than reading.

You can also use Instagram or Twitter to promote products. Affiliate marketing can be very lucrative if you enjoy spending time on social media. Just bear in mind that it might take some time before you start making money.

Summing It Up

Residual income, or passive income, is a great source of additional earnings. You can try any of these methods and see which one works for you. It’s important to diversify your investments and sources of income in order to reach the maximum benefit.

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