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The Difference Between Passive Income and Residual Income

Posted April 11th, 2012 in Making Money by Jeremy Waller

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I came across a podcast the other day called Residual Income Life. It sounded like something up my alley. I like residual income. So I started listening to it and come to find that it’s your run of the mill internet marking podcast.

They talk about building websites, selling products and marketing on social media. On one hand, I was disappointed that it was another “me-to” blog, but on the other hand I was pleased that they actually called what they are doing residual income.

I’m involved in a lot of internet marketing on the side. I follow a number of internet marketing and business blogs. One of my favorites is Pat Flynn at Smart Passive Income.

Pat is a great guy, but most of what he does it not passive income. In fact, most of what he does is miles away from passive. He works his tail off. What Pat, and most people in his niche have, is residual income.

Some people use passive income and residual income interchangeably, but they are two separate things.

I consider passive income to be something where there is one singular point in which you invest with the goal of generating returns for which little or no work is required to maintain.

Some examples of passive income are:

  • Income from dividends or bonds
  • Real estate (assuming you have a property manager)
  • Silent partner in a business
  • Interest on savings accouns

Residual Income is something that results from some amount of work up front that you will continue to receive proceeds from for a certain period of time.

Some examples of residual income are:

  • Book royalties
  • Some affiliate marketing
  • Some sales jobs

I worked in insurance sales for a couple of years. Many insurance products pay residuals years after you make the initial sale. Practically all of the work was done up front. But once the sale was done, I would continue to receive a commission for as long that that individual continued to pay their premiums.

Then there is a whole class of other income sources that sometimes fall under this passive income umbrella:

  • Blogging
  • Starting your own business
  • Working a job

Well obviously, working a job isn’t passive income. But, working a job isn’t much different than blogging. Blogging is a lot of work. It is far from passive.

Starting your own business is even worse. Business get their start on blood, sweat and tears.

There’s nothing wrong with starting a business. In fact, I think starting a business is a fantastic thing to do. Just don’t think a running a business is anywhere close to passive.

Out of all of these income sources, one type isn’t necessarily better than the other. Residual income is easy, but will typically have a lower ROI. Passive income requires more work, but has the potential for a large payout with minimal up front capital. And other sources of income sources can provide a steady stream of funds while you are working to build other income streams.

Personally, I want a mixture of both passive and residual income. I love the passive income I receive from my investments, but it’s a slow burning fire. Until I have a couple million bucks to invest, passive income isn’t going to replace my day job.

I also have a stream of residual income from a number of websites I have. They took very little capital to set up, but they took a lot of time. I don’t have a lot of extra time on my hands, so my¬†opportunities to expand this stream is somewhat limited.

My long term plan is to have a balance of both. It’s not the only way to do it, but it works for me with the time and money I have available to invest.

Do you have any sources of passive or residual income?

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