Residual income refers to the money you have left after paying your bills and covering all of your financial liabilities each month. Residual, from the word residue, implies something that’s leftover — in this case, leftover cash.
Generally speaking, the definition of residual income isn’t complicated — and the more residual income you have the better. It opens up some breathing room in your budget, allows you to save and invest more, and dedicate money toward other financial goals, too.
There are a number of ways to increase your residual income, which can help improve your overall financial picture.
What Is Residual Income?
The meaning of residual income is straightforward: It’s the portion of your overall income that’s available after you’ve met all your financial obligations for a given time period (usually monthly), e.g. paying your rent or mortgage, utilities, and making your credit card or student loan payments.
If you usually live below your means, then you may have residual income every month. But even if you think you don’t typically have much money left after paying your bills, it’s likely that you don’t spend every last dollar — and that residual income can help further your goals.
In that way residual income is similar to discretionary income, which refers to the amount of money you can spend as you see fit, after meeting your other financial obligations. It’s money that’s not necessarily budgeted toward one expense or another.
However, the term “residual income” has also been used to describe something similar 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.
How Residual Income Works
Residual income is one of several types of income. For example:
• Gross income is the amount you earn before taxes are withheld.
• Net income usually refers to the total amount of take-home pay, after taxes and other withholdings are deducted.
Once you’ve paid your bills and met other obligations, ideally you’ll have money left over that you can direct as you choose. You may want to save your discretionary income. Or you might earmark that money for a special project or goal each month. If you generally have, say, $200 left at the end of the month, you might use that to pay for art lessons, for a home renovation, to fund an IRA.
As such, maximizing residual income can and probably should be a goal for almost everyone. And if passive income streams can add to a person’s residual income totals, that’s even better — bringing in additional income without little or no effort can boost your efforts to reach specific financial goals.
Calculating Residual Income
Before you can accurately calculate residual income, you’ll need 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 and monthly expenses, the residual income formula is fairly simple.
Residual Income Formula
To calculate your residual income, 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.
Or, put another way: Total monthly income – all monthly expenses = residual income
These are the discretionary funds that can help you meet both your long- and short-term financial goals. Residual income is what you pull from to save for a vacation, or pay for 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.
Residual Income Calculation Example
Here’s a simplified example of how to calculate residual income. Let’s say that you take home $4,000 per month — that’s your total net income — and you have the following monthly expenses:
• Rent: $1,500
• Credit card: $300
• Student loan: $400
• Groceries: $400
• Utility bills (cable, phone, internet): $350
• Insurance: $150
• Car payment: $250
• Gas: $100
• Miscellaneous expenses: $200
Your monthly expenses total up to $3,650 per month.
Plug the numbers into the formula: $4,000 – $3,650 = $350
In this example, total residual income is $350 per month.
It’s useful to do this exercise because there is often a disparity between what you think you spend, and what you actually spend. By listing your primary living expenses and subtracting these from your income first, you may realize that you have more residual income than you first thought.
Residual Income vs Passive Income
As mentioned, passive income is money earned outside of your full-time job, and without your active involvement. In other words, it’s income that isn’t attached to an hourly wage or annual salary. Passive income streams could include things like cash flow from rental properties, sales of a product from an online shop, dividend-yielding stocks, royalties, and more.
That brings us to another type of income identifier: Active income. When parsing out active income vs. passive income, the key difference is, well, action! Active income requires action on the part of the earner, usually through working a full-time job. Passive income, on the other hand, may require a little bit of leg work, but not much.
With that in mind, usually, when the term active income is brought up, it’s in reference to full-time work or a job.
Pros and Cons of Building Residual Income
There are a lot of pros to residual income, and not many, if any cons.
Typically, residual income is a good thing, and the more of it, the better. More residual income gives people some operating room within their budgets, allows them to save more for emergencies or other financial goals, and invest bigger portions of their paycheck for the future.
If there are any downsides to residual income, it may be that some individuals — operating without a financial plan — end up frittering away their extra income every month without realizing how much they’re spending. While that may bring some short-term joy, not properly saving or investing can stymie their progress toward any long-term financial goals they may have, now or in the future.
10 Ways to Build Residual Income
The more residual income you have, the more financial breathing room you can make for yourself. So, for many people, finding ways to increase or build residual income is a top priority. But if you’re working a full-time job, have family obligations, and likely other things that demand your attention, you may feel you don’t really have much additional time to make money.
You could, for starters, invest in some high income skills to help you earn more. But if you’re otherwise 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 looks like from the other end of the dynamic: in exchange for owning and maintaining the property, you get a monthly rent check that can offset your mortgage costs. Or, if you own the home free and clear, a monthly rent check from your tenants can mean sizable earnings.
Investing in real estate 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 to note 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, there are numerous short-term rental platforms, including Airbnb, Vrbo, HomeAway, FlipKey, and HomeToGo. They allow individuals to rent out their own home or another property for shorter time increments. They can also set their own rental terms.
For instance, if 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, which not everyone is comfortable with, and there’s the chance they could cause damage to your property, too.
3. Peer-to-Peer Lending
Peer-to-peer lending, also known as P2P lending, is a relatively new kind of financial arrangement — at least in its formal version.
While people have been asking friends and family members for money since time immemorial, these days, there are a number 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 include active stock trading (day trading), or be 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. And, of course, investing in stocks involves risk, too.
Best Investment App of 2022
– Motley Fool
Trade stocks, ETFs, and crypto – or start an IRA.Get up to $1k when you fund an account today.
**Customer must fund their Active Invest account with at least $10 within 30 days of opening the account.
Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
5. Dividend Payments
There are two ways an individual can earn residual income through the stock market: By the appreciation in the value of the assets you invest in, and through dividend income. Some investors are able to build such robust portfolios that they can live solely 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 from company to company.
Most of the time, companies with well-established business operations and which generate steady cash flows 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 social media influencer often urges you to like, share, and subscribe to their channel or page? That’s likely because they have monetized it. They might see a portion of profits driven by the ads before and after their video content, or mention a specific product within a video or post itself to make money through an affiliate relationship.
Of course, you don’t have to be an influencer to make money online. Creators use a whole range of platforms, like Instagram, TikTok, YouTube, Substack, Twitter, or even their own private blogs.
In some cases, monetizing a social media presence is 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 on your own. (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 your overall amount of residual income. 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.
Examples include Ebay, Etsy, Craigslist, Facebook’s Marketplace, or PoshMark, and they’re all 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 a variety of companies have become a traveling option for dwellers of major urban areas such as Los Angeles, San Francisco, and Washington, 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.
In most cases, you do have to apply with the scooter companies to become a charger, assuming the city you live in even allows them to operate there. 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. And, in some cases, credit card rewards may be considered taxable by the IRS.
Residual income describes the money you have left over after covering your monthly expenses, and the more they have, the better, in most cases. It differs slightly from discretionary income, and passive income as well, though both are important to understand in the context of residual income as well.
There are numerous ways to increase a person’s residual income, often by opening up new passive income channels. You can, for instance, build up credit card rewards, rent out your property, invest in dividend-paying stocks, monetize your social media accounts, and more.
You can also use your investment portfolio as a tool for bringing in additional income. While you have many different investment platforms and options at your disposal, SoFi offers a comprehensive suite of investment products, user-friendly technological tools and stellar customer service. Check out SoFi Invest®’s Active Investing platform today.
What does residual income mean?
Residual income refers to the income you have left over after paying all of your bills for a given time period.
How is residual income calculated?
Residual income can be calculated by taking your overall monthly income and subtracting all of your recurring monthly expenses. That will leave you with an amount left over (discretionary income), which is considered residual income.
Is residual income earned income?
It can be. Residual income is derived from your total income, which is likely a combination of active and passive income streams. Your active income stream is likely earned income, so residual income is, in part, likely earned income.
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.