What is Residual Income?

Do something once and make money on it for the rest of your life. That’s the claim many people make about residual income. While this goal can be achieved, it takes time and effort (and usually a little money too) to get things rolling. In fact, it can take months (or even years) before you see a substantial amount of money from your efforts. Establishing successful residual income streams is not for the impatient or easily distracted.

Disclaimer: I am not a tax professional or an attorney and anything written in this article is not to be considered professional advice. Anything I write here you use at your own risk. It is important to CYA with the current legal climate in the U.S.

Residual income is not passive income. In my article “What is passive income?” I explain that passive income has a legal definition according to the U.S. Internal Revenue Service (IRS). You are not going to be earning passive income unless you are making money by renting things (including real estate) or by being a non-participating partner in a business. What most of us think of as passive income is actually residual income and is considered active, taxable income by the IRS.

Some examples of residual income activities include:

• Royalties from intellectual property, such as books and patents
• Advertisements or affiliate links on your blog or website
• Subscriptions or donations to your blog or website
• Investments in securities such as stocks and bonds (these are actually considered “portfolio” income by the IRS)
• Sales of online photographs or videos
• Creation of a business and then hiring someone to run it for you

The ideal residual income stream will produce money 24 hours a day, 7 days a week. It will have a global reach of almost 7 billion people. And this income stream will consist of a product that you personally don’t have to make, market, distribute, or interact with in any way. All you have to do is watch the money roll in.

The reality is that such a creature doesn’t exist. Even earning royalties on intellectual property require you to put in some effort (in addition to the massive effort required to actually make the item), especially if you want to make more than the bare minimum payments. There is always marketing to be done for any type of product or service. What you’ll want to do is carefully balance the potential income with the potential effort for every income stream you develop and find what works for you.

So, why are residual income streams important for developing a self-reliant lifestyle? You’re still going to need some money coming in regardless of how self-reliant you are. Very few people can be 100% self-reliant. Manufacturing most of the stuff we use in our daily lives is impractical at best. For example, nobody is going to try to manufacture his or her own laptop computer from scratch. You’ll still have to buy parts even if you did. The point is that you’re going to need some money unless you live in a cave and eat berries.

Some of the advantages of residual income streams are:

• You have the potential to be financially independent. You could ditch your job if your residual income streams produce enough money. Even if you don’t, you’ll still be in control over how much you make (it all depends on the effort you put into it).
• Making money shouldn’t be the primary focus of life. Residual income allows you to make money while doing more important things with your time.
• You can stop “working” altogether and still have income coming in. This is critical if you get sick or injured or have to divert all of your time to dealing with some other type of emergency. Or if you want to take an extended vacation. Or for any reason really.
• Most residual income streams are location independent. This means it doesn’t matter where you live. This fact alone gives you a huge amount of independence. You can live wherever you like and still make money.

Like most things in life, there are several disadvantages to residual income streams. The main problem is that you usually have to invest a substantial amount of time and effort into the project before you see any money. You’ll need to develop patience, vision, and determination if you want to develop a robust residual income. A desire for instant gratification can quickly kill most residual income opportunities and your ability to secure your financial future.

The other problem is that most “normal” people will think you’re wasting your time. We’ve all been conditioned to believe that spending our lives working for other people is the only way to make a living. The only other acceptable path is to become an entrepreneur and create a “real” business. Stray off these two paths and you’ll probably have to deal with a lot of criticism, skepticism, and efforts to “talk sense” to you. These are just obstacles you’ll have to overcome.

Developing multiple robust residual income streams is critical to establishing a more self-reliant lifestyle. It isn’t hard to do. It just takes effort and patience and determination. All that pays off when you make money while you’re sleeping or when you are on vacation.