What Is Residual Income and How Is It Different from Passive Income?

If you look into different ways to earn passive income for any amount of time, then you’ll probably notice that people will also often refer to it as “residual income”. 

Though the two are very closely related in definition, there is a very subtle difference.  In this discussion we’ll ask the question of what is residual income and how does it differ from the meaning of passive income.

First a Review of What is Passive Income

Before we look at residual income, let’s first review the definition of passive income.  The actual definition of what is passive income comes straight from the IRS:

Passive activity income includes all income from passive activities and generally includes gain from disposition of an interest in a passive activity or property used in a passive activity

Translation: Basically it’s any income that is earned passively or without involvement from the recipient of the income.   Wikipedia offers sever examples:

  • Rental property
  • Dividends from stocks, mutual funds, etc
  • Interest
  • Earnings from owning a business partnership
  • Etc.

The trend to notice is that in all cases is that passive income involves some kind of initial investment as a way to start the process of making more money. 

For example:

  • You had to buy the property to rent it out
  • You had to buy the stock shares to receive the dividend payments
  • You had to investment money into a CD to receive interest
  • You had to investment in a stake of the company to make a partnership and receive a cut of the earnings

So Then What is Residual Income?

While passive income takes some initial investment, residual income differs by not requiring any financial investment at all.

For example:

  • Working at your job
  • Recruiting sales leads for your business
  • Selling something over the Internet that doesn’t belong to you (and the website didn’t cost anything either) such as with an affiliate program
  • Royalties from a song you recorded

One could argue that “time” was certainly invested in each one of these activities, so that’s where the difference between the two can become somewhat of a grey area.

Needless to say, most of the time you would be fine using the two terms interchangeably since their definitions are so closely related.

Other Definitions for Residual Income

It is important to note that there are other existing definitions for residual income.  For example, if you look up residual income in Google, one of the first definitions you will find is from Investopedia:

The amount of income that an individual has after all personal debts, including the mortgage, have been paid. This calculation is usually made on a monthly basis, after the monthly bills and debts are paid. Also, when a mortgage has been paid off in its entirety, the income that individual had been putting toward the mortgage becomes residual income.

As you can tell this definition is off topic and out of context from our definition of what is residual income as it applies to earning passive income.

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