How does residual income work?

Residual income is a way of achieving financial freedom and making money while not actively working. Residual income is also called recurring or passive income. Once the residual stream is set up, it can bring money on a regular basis, without or with very little upkeep.

How it works?

Residual income comes after building an asset that will continue to bring money even after the work is done. The asset can be anything that can potentially bring recurring income like IP, Stocks, Property, Investment etc.

Types of residual income

Residual income can come in two ways, with capital and without capital:

With Capital

This type of residual income require capital investments:

Real estate properties

Income from renting or leasing property, land or exploration, displaying advertisement on real estate property etc.

Interest and dividends

Income from savings that earns interest or stock which brings dividend.


Investments in stocks, businesses or properties that increased its value since initial procurement.


Income from pension plans.

Without capital

This type of residual income does not require any kind of capital investment:

Intellectual properties

Income generated via royalties or licensing of intellectual property such as books, software, patents, trademarks, music, stock photos, videos, art etc.

Internet properties

Income from advertisements, subscriptions, affiliate links from web properties.

Associate Properties

Income from multi level sales, subscriptions, return customer referral, re-seller, affiliate, bounty or other associate programs.

Advantages of residual income

  • Financial independence if the residual income produces enough money.
  • Live security, regardless of emergencies.
  • Freedom to do anything and use the time.
  • Live anywhere in the world.
  • It builds entrepreneurial spirit.

Disadvantages of residual income

  • Setting up residual streams of income is not an easy task.
  • It requires dedication and lots of work in the start.
  • Most of the great ideas are already taken.
  • Difficult to calculate the minimum required return.
  • Can encourage short-run orientation.

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