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?
Even in the truest sense of the phrase, “residual income” is a bit of a misnomer — because residual income isn’t actually income, per se.
Rather, it’s the portion of your overall funds that are 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 send as you see fit, be that stashing it in your 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,” which is a different thing altogether.
Passive income is an additional income stream that doesn’t require ongoing work processes… and finding ways to earn passive income can definitely increase your total residual income.
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Calculating residual income
So, how can you tell how much residual income you have?
A good first step is to create a well-fleshed-out, honest budget, which will show you exactly where all your money is going each month. Your budget should include both fixed expenses, like a mortgage payment or student loan bill, as well as variable expenses — which may still be necessities, like groceries, but which offer you more control in how much you spend on them.
Once you’ve fully tabulated your budget and accounted for every ongoing cost, 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. Voila! The difference is your residual income.
Of course, calculating it is just the beginning.
Once you know how much residual income you have, you may come to discover you wish you had more of it — after all, 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, and also to save up for a down payment on a home, or your (future) child’s college tuition.
And building up enough of it is one of the most important steps to achieving financial independence.
This leads us back to the term’s second meaning, which as you’ll recall has more to do with passive income. How can you raise that bottom line figure without spending every second of your life working?
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Building residual income
If you’re working a full-time job, you may feel you don’t really have much additional time to make money. This means you may be wondering how to make residual income when you’re so busy making, you know, your regular income.
Fortunately, if you’re looking for ways to bolster your payday, there are plenty of low-effort ways that may help turn your cash into more cash.
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Real estate
Investing in real estate is one strategy when it comes to earning 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, even be pure profit.
House flipping is another popular option for those who have the skills and know-how to do so; house flippers choose a home priced below market value before making renovations that increase its value so they can resell high.
Getting into real estate investing as a way to increase your residual income 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.
But there are ways to get a piece of the real estate pie even if you don’t have the funds to buy a whole building.
It is worth noting that, like 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).
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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 handouts 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 might not approve.
(Think: once-in-a-lifetime trips to Australia before taking that grown-up job you worked so hard for throughout school.)
On the investor side, P2P lending platforms offer a unique and self-directed way to earn extra income through the interest your borrower owes you as they pay back the loan.
This interest rate may be marginally higher than it would be if you’d locked the money up into a CD or kept it in a regular savings account, where it would accrue interest, but at a low rate.
Depending on the platform you choose, you may maintain a lot of control over how your investment is utilized, and by whom, which can give you more confidence in the risk you’re taking.
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. (Again, investing comes with risk.)
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Stock market investing
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.
Which means it could be a great vehicle to build up your residual income. In fact, some investors are able to build such robust funds, they can live off dividend payments.
Stock market investing can be as active as day-trading or as passive as setting up a robot-investing 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 allows you to earn passive income — and thus increase your overall residual income — in two ways: first, by the appreciation in the value of the assets you invest in, and second, through dividend income.
(Want to learn more about how to get started with investing? We’ve got a whole wealth of content devoted to the topic.)
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Affiliate marketing and other online earning options
You know how your favorite YouTuber 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 as new readers and followers encounter, click and purchase the product.
Image Credit: DepositPhotos.com.
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.
This article originally appeared on SoFi.com
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