Residual and passive income are often discussed in the online business world. In business, the two terms are used semi-interchangeably to refer to revenue that is automated. However, in the financial industry, the terms actually denote two very different things.
Residual vs. Passive Income in Online Business
In online business, both residual and passive income refer to revenue that comes in without any active work. Some common examples of this concept are:
• Selling a digital product or course online
• Affiliate marketing
• Ads on a blog or YouTube channel
• Rental income
• Patent royalties and trademark licensing fees
To read more about passive income and having multiple income streams, read our article “Guide to Multiple Streams of Income” where we discuss how passive income can help you grow and scale your business without adding more work onto your plate or creating the need for more employees.
Residual vs. Passive Income in the Finance Industry
According to The Hartford, in the finance industry, passive income is still defined as “income that is generated after the labor has been done.” However, residual income has a completely different definition to finance professionals. In the finance world, “residual income” refers to the money that is left over in a personal checking account after all of one’s expenses have been paid for the month.
For example, if you make $5000 per month after taxes, and have $4000 in expenses (including rent, utilities, health and car insurance, car payment, etc.) your residual income would be $1000. Some banks may also subtract an estimate of travel expenses, food expenses, etc. when calculating your residual income total in order to get a better picture of how much money you actually have left over at the end of each month. Knowing your residual income will help the bank calculate how much money you are able to borrow for a personal loan, car loan, or mortgage.
Why is it Important?
Knowing the difference between residual and passive income is incredibly important when talking to a finance professional. While using the terms interchangeably in an online business setting is generally acceptable, being able to calculate your residual income is an important part of understanding your personal finances and applying for loans and shouldn’t be confused with income that is automatically generated.