If you invest in the stock market and all goes well, you’ll start to earn on your assets - meaning you’ll make an upfront investment, then continue to earn money without having to do anything extra. Here are a few examples - from financial to artistic and everything in between. Examples of residual incomeĮven when you limit yourself to one definition of residual income, there’s a fair amount of flexibility in the ways you can earn it. Not only does this happen to be the simplest definition to understand, but it’s arguably the concept that will have the most impact on your life. So, which definition should you use?įor the rest of this article, we’ll refer to residual income as passive income. You can think of this as another way to measure profit, and it helps investors decide if the firm or venture is worth putting their money into. In this case, it’s a firm’s net profit minus capital costs. Residual income is also one of the valuation methods that companies use to value their stocks. Just as disposable income helps determine the health of an individual’s finances, a measure of economic profit reveals how well a company is performing. Similar to how residual income can represent income after paying obligations for an individual, it can also reflect a company’s profit after the cost of capital. In this case, residual income is an excellent indicator of a borrower’s financial health and creditworthiness, especially since passive income sources can result in even more expenses (e.g., the costs of maintaining a website). For instance, how much of what you’re earning is available to use as you like after accounting for things like student loans and mortgage payments? Residual income is sometimes used to describe the income an individual has left over after paying their expenses. There’s no need to get confused, since the two terms can be used interchangeably - unless you’re going by one of the definitions below. You may have heard this phenomenon referred to as “passive income,” especially in the self-help and side hustle world. Usually, you have to invest money or time upfront and it offers a consistent income stream down the line. It’s not about getting paid for doing absolutely nothing, though. Residual income usually refers to money an individual receives without working directly for it. Here are a few common definitions that can help you avoid any potential confusion. However, in the case of residual income, it’s a little more complex.ĭepending on the context of the question and who you’re asking, you might get a few different answers. Usually, giving a definition is a quick and easy task.
Meaning of residual income how to#
Study up on the concept of residual income by learning a few definitions, understanding why you should care about residual income and finding out how to get started yourself. That’s the general idea behind residual income. Doing something once and getting paid for it for the rest of your life? It almost sounds too good to be true.
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