Difference Between Passive Income and Residual Income

The idea of ​​making money without doing any active work sounds pretty good. When it becomes a topic that you can earn money while you sleep (even though it’s a myth), they usually refer to passive or residual income. Although the two terms are often used interchangeably, there are some important differences. Here’s what you need to know about the difference between passive income and residual income, and what it means to bring in extra cash.

What is unearned income?

In theory, passive income is money you earn without doing the active labor of a typical day job. This income begins to flow after you put a certain amount of time or money up front with minimal ongoing effort after the initial investment.

Examples of passive income include renting a spare room through a homeshare app and selling clothes online. Again, most things considered passive income (real estate, book royalties, online sales, etc.) Requires more work and consistent effort than master of finance Believe me.

What is Residual Income?

According to Investopedia, there are three main definitions of what residual income means in different contexts (personal finances, corporate finances, or equity valuation). In personal finance terms, which is our main concern here, residual income is the income left after paying all your debts and bills. If you are applying for a loan, residual income is used to understand your creditworthiness as a borrower. It is essentially another term for disposable income.

This definition means that residual income is often passive. Passive income does not necessarily mean residual. In fact, leftover money from your primary source of income can be used to support new passive income initiatives. Both passive and residual income are taxable, but not at the same rate as active income.

Conclusion

Both residual income and passive income can increase your financial security, but passive income will have a greater impact. As explained on Indeed.com. Think about it this way. Let’s say you pay all your bills, reduce your debt by $500 each month, and have $500 leftover income. Had he rented a vacation home in the same month, his passive income could have exceeded $1,000. This is obviously a bigger gain. Of course, the caveat here is how you define “passive” with respect to booking and maintaining that rental property.

Ultimately, when people talk about extra cash flow with minimal effort, they are referring to passive income rather than residual. You may need residual income to get your “side hustle” off the ground. In that case, that passive income increases your total residual income. This is all the money left after the bill is paid.