Everything You Need to Know About Residual Income

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Who doesn’t dream of sitting on the beach, sipping lemonade, and watching the checks roll in without having to work?

This, ladies and gentlemen, is the good life. And you can do it, too, if you figure out a way to start collecting residual income.

Building a healthy flow of residual income is one of the best things you can do for personal finance and your net worth, especially as you get older. Remember, the trick is to work less and make more as you get closer to your golden years.

Here’s how it works.

What is Residual Income?

Residual income is the process of receiving payments after the income-producing work is complete. It’s a passive income stream that enables you to make money while you’re essentially twiddling your thumbs.

In other words, you do some work — like write a song, take and post a photo, write a book, or write a blog post. Once that’s done, you generate a solid residual income stream and get paid whenever people use or access your product, whatever it may be. Talk about supercharging cash flow!

Residual Income: The Opposite of Active Income

Chances are you’re already working a full-time or part-time job. If you’re bringing in money and working for it, you’re earning active income. In short, you’re performing services and getting paid for them.

There’s nothing wrong with earning active income. We all need to do it to pay the bills. In fact, most people tend to continue earning active income even after they start collecting large amounts of passive income, thereby accelerating their net income.

For example, professional musicians generate passive income by selling copies of their live concerts. They make money by playing the show (active income) and then they make money by selling that concert forever (passive income).

The Benefits of Residual Income

There are some pretty incredible benefits that come with collecting residual income.

Collect money without working

It’s impossible to overstate this benefit: Residual income means collecting money without having to generate active income.

In most cases, this works by selling a product or service that’s fairly automated. Or, you might get involved with real estate investing and generate passive income off of rent. To do that, you’d probably want to hire a property manager to oversee the day-to-day.

As an example, think of an author like Stephen King. Every time Stephen King sells a copy of one of his famous novels, he gets a direct kickback. Not bad for a prolific author who’s very popular!

For you, this could mean crowdfunding an idea, seeing it take off, and then opening up an online store on Shopify and other online platforms to earn some cash every time someone makes a purchase.

Build a retirement fund

Living off residual income can be very difficult unless you’re a rock star or YouTube sensation who creates a landmark piece of work that goes viral, enabling you to collect on a regular basis.

For most people, residual income is best put toward building a retirement fund. It’s a way of bringing in extra money, supplementing your lifestyle, and helping you prepare for the future.

Here’s where it gets really good, too. By investing passive income, you can generate capital gains, receive dividends, and earn interest — meaning you can significantly grow residual income without having to work very hard (more on that below). This is one of the smartest things that you can do as an investor, regardless of the amount of money that you’re bringing in.

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Fuel other residual income projects

Here’s another cool part about residual income: You can use it to produce more passive payments.

For example, suppose you take a really stellar picture and post it online in a stock photo store, and a company sees your work. You can then turn around and use that example to build a portfolio and do similar projects.

In short, by combining active work with passive income, you can lead to even more residual payments — making your financial situation stronger and stronger.

How to Collect Passive Income

This begs the question: How do you actually collect passive income?

This can be achieved in a few different ways. In some cases, you can link your bank account directly to the source for direct deposits. Most of the time, payments will come in the form of individual checks.

Sometimes — and this is important — you’ll have to be diligent about tracking down your residual payments. After all, not everyone is honest, especially online.

If you’re looking to make residual income off of content (like photos or videos), consider using a tracking service that will enable you to hunt down your work when it spreads to various channels, giving you the power to collect payment when people use your property.

Using Real Estate to Collect Residual Income

One of the most tried and true methods of collecting residual income is to purchase real estate.

This is often accomplished by buying an investment property in a populated area, like a beach or ski town. In this case, a home buyer will usually put a down payment on a piece of property that is a small fraction of the overall selling price.

For example, you may put down $20,000 on a $200,000 property. Then, over the course of the mortgage, you use a service like Airbnb along with a rental management provider to oversee the property and deal with guests. In this scenario, rental income can be an excellent source of passive income.

If you buy a house in an area with year-round traffic and exciting nearby destinations, then you can collect residual income and pay down the mortgage quickly. And as long as you break even at the end of every month, you could increase your initial down payment significantly when you eventually decide to sell.

TIP: investing in real estate doesn’t have to mean a direct property purchase. See our list of the 5 different ways to invest in real estate.

Are all homes investments?

Here’s an important thing to remember: Not all homes are investments and not all investments will yield residual income.

In other words, most people buy their homes to live in them, meaning they aren’t typically in a position to sell their home when the market suggests they should. Selling a home can take many months or even years.

What’s more, homes can depreciate in value over time. In most cases, it’s the land underneath the domicile that appreciates in value.

If you want to make residual income off your home, you would be better advised to buy a place with an extra room or two and a spare bathroom, or a multi-family house with a whole separate unit. This way, you can still live in your house and collect passive income.

This strategy is rapidly growing in popularity among investors who live close to big cities. For example, you might be able to partner with a business associate who only spends a few nights each week or month in town and needs consistent lodging.

This person could make a great part-time roommate, providing friendly banter and camaraderie in exchange for a place to stay. You could even work out this type of arrangement with multiple working professionals at a time.

Are rental properties risky?

You should be very careful before you decide to purchase a rental property. If you’re thinking about moving in this direction, remember that location is absolutely key for success. Buying a place that’s too far from areas of interest — like bars, restaurants, and ski mountains — could make it difficult to attract steady renters, especially during down seasons. And the last thing you want to do is get saddled with an extra mortgage with no way of paying for it.

TIP: rental properties can help with more than just residual income. It can fund your retirement. Check out our article on Building Rental Income for Retirement.

Leverage REITs

One popular way to make money off real estate is to leverage real estate investment trusts (REITs). By purchasing REITs that pay consistent dividends, you can collect passive income at periodic intervals without having to do much at all.

The benefits of using REITs is that you can make money in real estate without having to buy an entire property or deal with the hassle of managing an actual piece of property and potentially difficult renters.

This means you won’t have to pay for maintenance or upgrades or even expensive property management companies to watch the property and clean up after guests. In this light, REITs can help you reach your financial goals while yielding healthy returns if you invest smartly.

Easy Residual Income Ideas

How exactly can you start earning residual income? As it turns out, it’s not that hard.

Here are some easy ways that you can get started producing residual income to pad your bottom line. If you are strategic about this process, you can generate monthly income without having to do much or any hard work. All it takes is an initial upfront investment in the form of time and labor and you’ll be good to go.

Affiliate Marketing

Affiliate marketing involves promoting third-party products in exchange for a commission. For example, you could work as a blogger and strategically embed advertisements and links to partnering websites. When people click on the links and buy products, you can collect commissions.

There’s a catch, though: Affiliate marketing is hard work. For example, if you start a blog, you’ll still have to post content and attract viewers organically. And this can take a significant effort.

If you’re thinking about starting an affiliate marketing project, consider expanding and hiring a small team to manage it for you. Treat it as more of an investment so that you can spend more time sipping lemonade and less time doing the creative heavy lifting.

Another strategy you can consider is buying an existing blog that already has a strong foundation of readers. If you decide to take this route, just make sure that the traffic that’s coming to your website is legitimate and not full of bots. You’ll also want to purchase a blog that’s interesting and in demand.

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Peer Lending

Yet another way that you can earn residual income is through a peer lending app like Credible, LendingTree, and SoFi. All three of these apps are perfectly legitimate — and tried and tested by investors like yourself.

These types of apps bring together loan seekers with financial backers who are in a position to provide capital. Most services offer flexible loan terms, along with a variety of metrics and services designed to help lenders understand who they are providing money to.

By using these apps, it’s possible to sit back and collect interest on the money that you loan — essentially acting as a credit provider, without having to do any of the legal work. Options are available to loan money to both businesses and consumers.

Of course, peer lending can still be risky. Be very careful before deciding to loan any investor money, as you could wind up losing out in the long run. Use the available tools to vet your clientele, and don’t be afraid to walk away from a deal if it’s not in your interest.

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Invest Through a Brokerage

If you’re considering going the peer lending route, then you should definitely also be investing money in the stock market.

Just like with REITs, dividend stock options can help you bring in regular income at various intervals — like on a quarterly or annual basis. The more dividend stocks you purchase, the more money you will earn.

Keep in mind that, if you decide to invest in the stock market, you’ll have to manage market volatility which can eat into your residual earnings — and, if you’re not focused on the long term, could keep you up at night.

There are various ways that you can push back against market volatility, though, like investing in index funds or exchange-traded funds (ETFs).

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Open a High-Yield Savings Account (HYSA)

A high-yield savings account (HYSA) is similar to a traditional checking or savings account except it’s typically offered through an online-only bank.

In short, a HYSA provides interest rates that are significantly higher than the national average that you’ll find at a leading bank. The more money that you put into your HYSA, the more money you will earn on a monthly basis.

Just remember that HYSA interest rates are variable and subject to the state of the overall economy. They tend to rise when the Federal Reserve increases interest rates and drop when the Fed cuts them.

Even during a downturn, HYSAs can still produce much stronger results than regular old savings accounts — and they’re a decent way to earn interest without trying very hard. In fact, the hardest thing that you’ll have to do is avoid touching your money and moving it out of the account.

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Fund a Restaurant

One great way to build residual income is to fund a business like a restaurant. If you have a little bit of money to put on a down payment, and the right connections, you should consider going in on a business as a silent investor.

This will enable you to bankroll the organization and get paid based on its success without having a spotlight on you.

Of course, know what you’re getting involved in before you go ahead and make that kind of investment. The restaurant industry is incredibly difficult and many organizations wind up going belly-up within their first year.

However, if you follow the rules and provide great food at reasonable prices, a restaurant can be a cash cow … and you might even get discounted meals or drinks at the bar.

If you’re considering taking this route, look for areas of need in your community. Spend some time studying maps and try to find services that may be lacking (like pizza, Chinese food, or a bakery, for example).

You could either start a business from scratch or look for a struggling organization that may need an injection of capital.

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Tip: Use Residual Income to Pay off Credit Card Debt

If you have considerable credit card debt — like $10,000 or $20,000 — then you should consider building residual income to pay down accounts with high interest. This will, in turn, lower your monthly payments while also working to pay down your bills. The hope is that in time, you will be debt-free.

This is also a good lesson in avoiding credit card debt. Nobody likes seeing their money go toward credit card interest payments. Be smart about how you leverage credit to avoid this pitfall.

FAQ

Is network marketing a good idea?

In general, you should be skeptical about network marketing.

Of course, not all network marketing models are Ponzi schemes. There are a few legitimate network marketing companies that can make you money with, if you treat them like a full-time business and know how to hustle. If you have a great product and a strong team selling underneath you, you could actually do quite well for yourself. Just keep in mind that there are a significant amount of scams in this space to watch out for.

Can you earn passive income through an online business?

It’s possible to earn passive income through an online business, leveraging a platform like Amazon or starting a social media account on a site like YouTube. In fact, starting a YouTube channel can be a great way to earn income.

Just keep in mind that there’s a fine line between passive income and active income. If you’re putting hours of effort every week into your online business, then it’s not really passive income. Passive income is designed to reward you for not doing anything.

If you’re considering starting an online business, then you should think about a way to aggregate content or leverage existing assets to reduce the amount of work you’re putting in.

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The Bottom Line

As you can see, it can take a little bit of work to get started. But once you set up a residual cash flow, you’ll be in a great position to keep earning more money as time goes on.

Here’s a disclaimer to think about: If you keep your expenses low, the money will start rolling in. As such, it’s a good idea to have a plan in place for how you will manage your residual income.

Look into starting an investment portfolio and a savings plan to stay on top of your finances so that you will know exactly where to funnel your money on a monthly basis. Diversify your income using index funds, mutual funds, ETFs, and individual stocks.

In addition, you should also look into cryptocurrencies like Bitcoin as emerging investments to consider. Even if you don’t end up buying them (they are incredibly risky), you should still have a solid understanding about how they work and how they can potentially earn you income.

If you’re good about managing money, and you keep these tips in mind, you will put yourself in a great position for long-term financial success.

There’s only one thing that remains to be seen: What residual income streams are you going to unlock on your path to financial independence?

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