No matter how much money you’re earning, chances are good you sometimes wish you had a bit more. Even if you’re not thinking of making a big purchase, it’s always nice to have extra cash around to bolster your emergency savings or invest for retirement.
There are only 24 hours in a day, however… and you probably already work eight and a half of them, at least. Creating more income without spending more time on the clock is an attractive concept, which is one reason you may be hearing the words “residual income” around the water cooler.
But what is residual income, exactly? How do you calculate it, and what does it have to do with your overall financial picture?
What is Residual Income?
Residual income is the portion of your overall funds that’s available after you’ve met all your financial obligations, like handing over your rent check and making your student loan payments.
You can think of it as similar to the idea of “discretionary income.” It refers to the amount of money you have available to spend as you see fit, whether that’s by opening an IRA or splurging on a new pair of shoes.
However, the term “residual income” has also been used to mean something closer to “passive income” or passive income streams that don’t require ongoing work. Finding ways to earn passive income can increase your total residual income.
Calculating Residual Income
So, how can you tell how much residual income you have? A good first step is to create a thorough, honest budget, which will show you exactly where all your money is going each month.
Once you’ve fully tabulated your budget, the residual income formula is simple: You’ll take the total amount of money you earn in income and subtract the total you’re obligated to spend on a monthly basis. The difference is your residual income.
These are the discretionary funds that can help you meet both your short-term and long-term financial goals. Residual income is what you pull from to fund your Netflix membership or bi-monthly trips to the nail salon, or bigger financial goals like saving up for a down payment on a home or your child’s college tuition. Building up enough residual income is an important step in achieving financial independence.
Which leads us to the question: How can you raise that bottom line figure without spending every second of your life working?
10 Ways to Build Residual Income
If you’re working a full-time job, you may feel you don’t really have much additional time to make money.
Fortunately, if you’re looking for ways to bolster your residual income, there are plenty of ways that may help turn your cash into more cash.
1. Real Estate
Investing in real estate is a strategy to earn passive income. Even purchasing a house to live in might be a way to increase your overall net worth, if the value of the house appreciates.
A more active and aggressive tactic is to purchase a property specifically to earn rental income. If you’re a renter yourself, you probably know what that one looks like from the other end of the table: in exchange for owning and maintaining the property, you get a monthly rent check that can offset the mortgage. Or if you own the home free and clear, a monthly rent check from your tenants means sizable earnings.
Investing in real estate property can seem overwhelming. There’s a pretty steep barrier to entry in the shape of a down payment, which even in the best-case scenario is probably going to be a weighty five-figure sum.
It’s also important that as with any investment, buying or investing in real estate comes with risk—sometimes, very expensive risk. You could go months in between renters, you may have to sell your home during a market downturn and lose money on your investment, you may not be able to sell your flip for what you were aiming for. Proceed with caution and after doing a lot of research.
2. Short-Term Rentals
Renting out a real-estate property doesn’t have to just involve finding tenants who are willing to sign a lease for one year or longer.
These days, with the advent of short-term rental property websites like Airbnb and Vrbo, individuals can rent out their own home or another property for shorter time increments. They can also set their own rental terms.
Let’s say for instance, a person wants to go on vacation, they can rent out their own home while they’re gone–an opportunity that could cost minimal extra work. The risk of course is that you’re letting strangers stay in your home and there may be security costs and risks related to this endeavor.
3. Peer-to-Peer Lending
Peer-to-peer lending, also known as P2P lending, is a relatively new kind of financial dynamic—at least in its formal version.
While people have been asking for funds from friends and family forever, these days, there’s a whole group of websites and platforms that help private parties seek loans from private investors, which can help fund projects and ventures a traditional bank may not approve.
On the investor or lender side, P2P lending platforms offer a unique and self-directed way to earn extra income through the interest your borrower owes. This interest rate may be marginally higher than it would be if you’d invested in a CD or kept it in a regular savings account.
However, as an investor it’s important to understand that P2P loans are unsecured by any kind of collateral, which means there’s no guarantee you’ll get your money back.
You probably already know stock market investing is a way to build your retirement fund, or save for any long-term goal by taking advantage of the power of compound interest over time. That means it can be a vehicle to build up your residual income.
Participating in the stock market can be active stock trading or as passive as setting up a robo-advisor account, where computer algorithms do the work for you. There’s also a whole spectrum of options between the two extremes, like opening a brokerage account and building a portfolio of index investments.
Either way, investing can help you earn passive income—and thus increase your overall residual income.
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5. Dividend Payments
There are two ways an individual can earn residual income through the stock market: first, by the appreciation in the value of the assets you invest in, and second, through dividend income. Some investors are able to build such robust funds, they can live off dividend payments.
Dividends are a portion of a company’s profits that’s given out to its shareholders. They’re typically distributed as cash and given out on a quarterly basis, although this can differ on a company-to-company basis.
Most of the time, companies with well-established business operations that generate steady cash flow are the ones that give out dividends. For instance, blue-chip stocks, like those in the Dow Jones Industrial Average or S&P 500 Index may be more likely to be dividend-paying companies.
6. Affiliate Marketing and Other Online Earning Options
You know how your favorite YouTube is constantly barking at you to like, share, and subscribe to their channel? That’s probably at least in part because the owners of monetized YouTube channels earn money through their video creations.
They might see a portion of profits driven by the ads before and after their content, or mention a specific product within the video itself to make money through an affiliate relationship.
Of course, you don’t have to be a YouTuber to make money online. Creators use a whole range of platforms, from Instagram to Facebook to their own private blogs.
In some cases, it’s as simple as setting up an affiliate account with the vendor of the product you’re recommending. Although this kind of residual earning option does require some effort in the way of content creation, once you’ve got your work up and running, you can see a passive income stream that persists over time.
7. Freelancing and Independent Contract Work
While this option is the least “passive” on the list, it’s also becoming one of the most accessible. Thanks to the proliferation of peer-to-peer sharing apps and the growth of the gig economy, taking on some extra, flexible side work is more possible than ever.
If you’re a writer, photographer or have any other marketable skill, you can also take to the streets and sell your services solo. (That said, succeeding will probably necessitate shelling out at least a little bit of cash on marketing materials, like a website.)
Although freelancing or taking on a “side hustle” isn’t a way to make passive residual income, it is a way to increase the overall amount of residual income you have. For maximum results, you might combine this tactic with others listed above to create as many revenue streams as possible.
8. Re-Sell Things on Online Marketplaces
Similar to P2P lending or short-term rental websites, there’s been a growth of websites or online platforms that allow individuals to sell and buy things.
Take Ebay, Etsy, Craigslist, Facebook’s Marketplace, PoshMark–all are venues that people can use to resell used items or even things they bought but never even opened out of the package.
If you’re able to create or make items, such as photographs, art pieces, or even small souvenirs, these online marketplaces are also a great option to generate additional residual income.
9. Charge Electric Scooters
Electric scooters have cropped up across the country. While not legal in all cities, electric scooters from Bird and Lime have become a traveling option for dwellers of major urban areas such as Los Angeles, San Francisco and D.C.
An individual can earn extra income by charging these electric scooters. The companies rely on everyday individuals to locate the scooters, charge them overnight, and put them out the next morning for use again. It’s another for of a gig-economy job, such as driving Ubers or Lyfts.
You do have to apply with the scooter companies to become a charger and your city needs to offer scooters. But the sign-up process is relatively simple and once you have the app, which is the same one used by consumers, you can provide your bank information for payment. The downside is that sometimes there’s a waitlist, and it can be time-intensive to locate, charge and return multiple electric scooters.
10. Credit-Card Points
Credit cards can present lucrative opportunities for individuals. Credit-card companies are always on the lookout to incentivize new customers to sign up and sometimes do so by offering rewards.
Rewards can include cash-back for spending, membership reward points that convert into spending opportunities, as well as points that can be used for specific types of purchases like travel.
Individuals who want to earn additional income through credit-card rewards should read the terms and rules for each credit-card company carefully. Plus, it’s important to remember that while the number of credit cards a person has doesn’t directly affect their credit score, it can be cumbersome to juggle multiple credit cards, leading to late payments.
Increasing your residual income is an important step toward achieving financial goals of every shape, size and timeline. And thanks to the power of compound interest investing is a good way to drum up residual income.
We know investors come in all shapes and sizes, too, just like their goals. And we know that getting started can be scary. From learning the lingo to figuring out which stocks and other assets are actually worth purchasing, beginner investors face a steep learning curve at the start.
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