You can create realistic financial goals and create a prudent budget with residual income. It is possible for both individuals and professional groups to compute and evaluate their residual income. Understanding this idea could help you become more adept at financial planning and expand your understanding of standard accounting procedures.

This article defines residual income, explains its distinctions from passive income, enumerates the various kinds of residual income, and provides creation instructions.

What is Residual Income?

The money left over after all expenses are paid by an individual or corporation is known as residual income. Any money left over after a person pays for all of their bills, housing, food, and other expenses, as well as debt repayment, is their personal residual income. The cash left over after a business pays all of its bills, including the cost of utilities and raw materials, is known as residual income. It represents and serves as a gauge for the effectiveness of a company, a division within it, or even specific investments the company has made.

In general, having more residual income gives you greater financial freedom to reach your own financial objectives, grow your employer’s company, and make decisions that will benefit both internal and external stakeholders, like investors and employees. It also gives companies the chance to evaluate their key performance indicators to see if they can be altered to track the success of the company.

Residual income is calculated using the following formula:

Residual income = Net income – (Equity x Cost of equity)

• Net income is earnings after all expenses, costs, interest accrued, depreciation, amortization and taxes.
• Equity is the total assets minus the total liabilities enumerated on the balance sheet.
• Cost of equity is the minimum return required on an investment.

For both enterprises and individuals, residual income and passive income are conceptually quite similar. Nevertheless, there is a crucial distinction between the two ideas: By definition, residual income is not the same as revenue that an organization generates on its own.

Calculating a company’s financial results to assess operating performance—that is, to see whether they are meeting their financial obligations or to monitor the amount of money they have left over that may be utilized to further develop the company—is known as residual income. In the context of business, “passive income” refers to the capital that a corporation accumulates with little effort on its part. However, in the context of personal finance, “passive income” usually refers to earnings from investments such as real estate or side projects.

Example of Residual Income

Because residual income frees up time for planning how to grow operations, residual income in business is beneficial to a continuous improvement strategy. Different kinds of residual income that may be included in a company’s financial obligations include the following:

• Real estate investing: Purchasing a rental property is a type of residual income because you’re doing all the work upfront. By renting out the property to tenants, you can accrue income each month with the rent payments you charge for the property. You can also invest a certain amount on a property and become an owner once it’s fully funded. This way, you can budget your investment and make plans to finance it in the meantime so your company can still be solvent.
• Stocks: The stock market provides a lot of opportunities to make a profit for your company that you can report as equity on your balance sheet. The more money you make from an investment, the more residual income you’ll collect. Index funds are a way to make investments in multiple stocks gathered in a single fund, and your profit can accumulate without additional effort provided on your end.
• Bonds: Bonds help you have an ownership stake in loans taken out by companies and governments. Investors receive fixed-rate interest payments about twice a year. Once a loan matures, then you can reinvest in other bonds to have consistent cash flow coming in and out of the business. However, you’re still making money and not directly putting in the effort at each step of the process.
• Royalties: A royalty is an amount of money that goes to the owner of a product or patent by those using that product or patent on an ongoing or one-use basis. It could be assets, intellectual property, resources or copyrighted material. The amount you receive in royalties is the income you receive after you do all the work necessary up front for the product to be on display.

How to Create Residual Income

Review these steps for creating residual income in a business environment and use it to your advantage:

1. Review your balance sheet

Your balance sheet determines the available assets you have after you subtract liabilities from your equity. You can use the result to determine the state of your employer’s finances. You may assess how your company is earning money before you can adjust and improve those asset-making procedures.

2. See if your profits result from active income

Active income is the income you earn by participating in each step of the process to make money from a provided service. Employee wages and salaries can reflect the amount of active income your employer generates. If your employer generates income solely from active income, then measures you can take to increase your profits through residual income.

3. See if your profits result from residual income

Review the types of residual income to see if they’ve contributed to producing income for your employer. Larger businesses or corporations normally invest widely in stocks, bonds and real estate to maintain their financial health, whereas small businesses tend to be more selective in their investment strategies. Also, creative individuals may be working on their own to get their artwork published and receive royalties for it. For example, musicians can sign with record companies, who get royalties from the music they promote on behalf of the musician.

Read Also: How to Create a Passive Income Stream through Investing

Here are residual income streams to get you started:

1. Start a dropshipping store

A dropshipping store is essentially an online store where people come to buy different items. When a customer requests an item, the order goes to a third-party supplier who then ships the product directly to the customer. This means you don’t have to worry about storing inventory or how to get the item to the customer. 

Hence, running a dropshipping store can be one of your best sources of residual income. With suppliers handling the major aspect of your operation, i.e. product fulfillment, you will have less active work like shipments and customer service.

To start, you can create an online store on Shopify. Once done, install the Automizely app so you can find dropshipping suppliers for your business.

2. Open a subscription business

This residual income business requires some upfront work to get off the ground, but execute it well, and you could sit back and watch the money in your bank account grow automatically. From clothing to shaving items, there are a lot of products you can sell through a subscription business.

And you can hire a fulfillment house to package and send out your products and subscription boxes for you. Companies like Cratejoy can also handle the process of onboarding new customers, so there’s minimum work involved once the business starts running.

3. Rent out your property

As remote work has become a hot trend, you may not be using your home or apartment as much as you normally would. Instead of letting it sit empty, create a residual income stream from it by listing it on Airbnb or a similar platform.

Even renting a spare room can generate discretionary income if you don’t want to rent your entire property upfront. A tip for being successful with this strategy is to keep your tenants happy. 

Far too many landlords fall into the negative stereotype of being greedy, neglecting concerns and issues, and generally ignoring the expectations for amenities. To be the landlord everyone likes (and refers), check in with your renters daily and address any inconveniences at the earliest opportunity.  

4. Crowdfund real estate

Real estate crowdfunding relies on small investments from several people to purchase property or fund real estate development. You can sign up to be one of the investors and make easy residual income. Websites like Fundrise and RealCrowd allow people to pitch in at different investment tiers.

As soon as your investment is processed, you become an equity shareholder in a real estate venture and start earning passively through regular dividend payout. You may also benefit from property appreciation over time. When the assets owned by the investors go up in value, dividend earnings also rise.

To start, make sure to sign up with a few real estate crowdfunding websites. Having access to multiple sites means you should be able to access four to eight new property deals every month, more than enough to be picky with your investments. 

5. Create an app

If you possess some technical skills, making an app can be a great way to leverage your existing knowledge to earn some residual income. You could put together an expense tracking app, a news app, a to-do list app, or a recipes app, depending on what people would find useful.

Or if you have an idea for a gaming app like PUBG, give it a shot. It could be the key to a large fortune. 

If you don’t know how to code but have a great idea for an app, consider hiring developers and coders from Upwork or PeoplePerHour. Once you’ve hired someone and built your app, you can earn residual income through advertising, paid access, and add-ons that users can purchase to make the app more enjoyable. 

6. Publish a book

This is one of the best ways to make residual income. Whether you opt for the services of a traditional publisher or self-publish through print-on-demand services, publishing a book is a really smart financial move.

Earnings will continue to roll in through royalties and purchases, and there’s also the chance to make thousands should the book go on to become a bestseller.

The best way to start this is with a plan, rather than penning away whatever comes to your mind. That is, consider what you’re passionate about or skilled at when brainstorming a title for the book. 

It’s also a good idea to evaluate if the information you intend to share will be just as relevant five to 10 years from now. This will help ensure that people keep buying your book.

7. Sell photos 

Are you good with a camera? Do you like taking candid shots of people in public places? Consider selling your work on websites like Getty Images or Shutterstock. Tons of websites need to use stock images every day in blog posts and social media—and their owners are willing to pay for the right to use them. 

Then why not sell rights to your collection of images? You can potentially license a set of photographs and sell them over and over with minimal effort after the initial upload. 

All the logistics of image sales are managed by the platform you use to sell your photos.

8. Sell digital products on Etsy

Etsy has an Instant Download page where you can sell all kinds of digital products. These are items you deliver electronically rather than physically. You can sell anything from anniversary or graduation cards to wall prints, inspirational text, or digital copies of your artwork.

The obvious benefit of this is that once you’ve created the digital file, you can sell multiple copies of it by listing it on the platform. Plus, selling digital products has less overhead, as you don’t need to pack or ship anything.

9. Build an Instagram following

Naturally, this requires some upfront work. But once you build a loyal fan base, making residual income becomes easy.

To begin, create an Instagram profile and start posting content for a specific niche. And while you’re at it, use Instagram hashtags to get your posts in front of a wider audience. 

While you may not be able to gain a following like any of the top Instagram stars, there’s plenty to be made from running a smaller Instagram account focused on a niche. 

Businesses within your niche will consider the people you attract to be valuable to them, since they’re likely targeting a similar audience. And that could result in a decent-sized payout for you if they choose to sponsor your content.

Finally

Though not everyone is able to generate a second source of income, everyone enjoys the concept of doing so. This could be the result of a lack of planning or sound guidance. You should be able to increase your income with these residual income ideas, and most of the time you can do so passively.

It is simple to incorporate these techniques into your present work. so that you can begin accumulating wealth in addition to your regular job from 9 to 5 or another source of income.