How Can You Earn Residual Income?

If you’re an experienced individual in the big world of finance and investing, you probably know what
“Residual Income” is by now. It’s a term that is quite commonly used when talking about money in any
kind of way. But if you don’t, let’s take a look at what residual income is first and how you can earn it by
looking at the two main categories of income.

 The Two Main Categories of Income

Income is what is referred to as the money that an institution, business, or program receives in
exchange for their products and services. This can be measured by daily, weekly, monthly, and yearly
means.

Residual income is only one of the main categories of income, the other category is called “Passive
Income”. These two types of income are often mentioned when you’re applying for a loan, making an
investment, or paying bills. Passive income is generally different from residual income so let’s take a look
at what passive income is first.

 What Is Passive Income?

Passive income is the money earned from a service that has small activity going on. Services can earn
passive income quite easily because it doesn’t require too much effort on their part. As the time passes
and your service grows along with the number of regular loyal customers you are getting, your service’s
passive income will also gradually increase.

There’s a benefit to this because if you earn enough passive income on a regular basis, you don’t have to
worry too much about the work and effort, you can focus on enlarging or enhancing your service to
further grow your passive income.

 What Is Residual Income?

Residual income on the other hand is a little bit more complicated. To put in general terms, residual
income is basically a form of passive income because it can also be earned by certain entities without
exerting to much effort on their part. Thing is, residual income can mean something different in different
contexts.

 Residual Income in Personal Finance

When looking at residual income in the perspective of personal financing, it may start to look a little bit
different. See, banks and financial institutions look at your residual income in order to determine if
you’re worthy for loans and similar transactions.

Banks and financial institutions look at the money that is left with you once you have paid all of your
bills, expenses, and personal debts. That left over money is what they calculate as residual income.
Another way that banks and other financial institutions use to calculate an individual’s residual income is
by calculating all of their expenses.
These include mortgages, taxes, insurance payments, school fees and tuitions and credit cards. They
take all of these and subtract them to an individual’s monthly income to determine how much their
residual income is.

 Residual Income in Corporate Finance

Residual income is generally the same when it comes to corporate financing, though similar, still a
critical aspect in the corporation. Residual income is usually referred to as the company’s “Net
Operating Income”. A corporation’s net operating income is the amount of residual income they pertain
after paying all of its expenses and capital costs.

 Residual Income in Equity Valuation

When it comes to equity valuations, residual income is used in a tad bit more complicated way. In equity
valuations, residual income is used as the method of valuation for calculating the value of a certain
stock. Residual income also serves as the earnings stream for the industry of equities.

The figure of residual income when it comes to equity evaluation is calculated by subtracting the cost of
the net capital from the net income.

 How Do YOU Earn Residual Income?

Now to answer that question, you earn residual income by earning more money than what you’re
spending. Residual income is calculated by subtracting all of your monthly expenses and calculating
what is left of your monthly income.

So in general, the more money you earn and the lesser expenses you pay, the bigger your residual
income becomes.

Key Takeaways
So overall, knowing what and how to calculate you or your business’s residual income can be very
beneficial. You know how much you earn or keep after spending it on your monthly expenses and with
that knowledge, you can know how to better spend your money for the sake of you, your family, and
your business.