Passive income and residual income have some similarities, but here are seven key differences between passive income versus residual income:
The sources of passive income and residual income are usually different. For example, a person might own a rental property that pays monthly rent, which is passive income. The person does little or nothing to earn money, other than buying and maintaining property. Residual income can also come from a variety of sources, but generally comes from the industry or sector in which a person works or the business operates. For example, a CPA, or certified public accountant, might create an accounting course for sale. It creates residual income using their special skills.
While residual and passive income have the same goal, to increase the income of a person or business, individuals, companies and investors can seek both income for various reasons. A person may be looking for both income to build independence or financial security, create an emergency fund for sudden expenses or enjoy early retirement. Companies and investors can seek both income simply to increase their profits, earn more money or pay company shareholders more in the form of dividends and other rewards.
Passive and residual income often have different participation requirements. For example, passive income usually requires some type of upfront investment, whether it be time, money, or a certain skill set. For example, an individual might pay for a house to rent, make a down payment and finance the remainder of the house. Once they have secured the house, no further action is required except finding tenants and maintaining their rental property. Residual income can require more maintenance. For example, a CPA who creates an online course might consistently update the course for new accounting regulations.
Passive income risk may vary, depending on the source. Landlords who rent out their properties run the risk of tenant damage or loan default. Investors who earn passive income from stocks can run into financial risk if the stock price drops significantly. Residual income usually has minimal risk, because it is what is left when you meet all of your financial obligations. Many people and businesses focus their residual income on passive income sources, effectively converting residual into passive income and creating more income streams.
For the average person, residual and passive income can be earned. Passive income can be more challenging to create because it often requires a significant investment of time, skills, or money. For example, buying a rental property can cost hundreds of thousands of dollars, including upkeep and maintenance costs. Residual income may be easier to come by because there are many ways you can create it. For example, you might work overtime a few weeks each month and focus on reducing your debt to create more residual income.
Passive income and residual income options vary and often have very different requirements. One can easily generate residual income by lowering household debt and managing their money more efficiently. Passive income sometimes requires specialized knowledge, such as investing. For example, one can create passive income through cryptocurrencies but that requires an understanding of how cryptocurrencies work and what options are there. Residual income usually has a wider variety of options, with a focus on providing predefined services or managing finances to generate more free income.
7. Financial security
While both income can help individuals build financial security and independence, passive income usually has a more profound effect. For example, a person might reduce their household debt by $400 per month, resulting in a residual income of $400. With something like a rental property, they can earn anywhere from an additional $700 to $1,500 per month in completely passive income, depending on their location. When you think of financial security or independence, you probably think of passive income. It is also often discussed more by experts and advisors