You’ve probably heard of it before; residual income and passive income. Although many people think that both mean the same thing, this is not the case. It’s a branch of the same tree. Both are a category of income. We will try to explain what the differences are.
People often sprinkle with these concepts when presenting a network opportunity. We think it is important to use the right terms at the right time, so we think it is important to determine what the terms mean.
Residual income can be passive, but passive income is not always residual.
Passive Income
Passive Income is earning an income by doing business without too much to no effort. It often takes time and money to set up a system that generates passive income.
There are many ways to build passive income. You can think of renting out apartments, a holiday home, selling goods online, an investment, etc.
Passive income can give you financial security if it is high enough. given it is not yet high enough to stop working but it is good that it can offer you some financial security. After all, an addition to your existing income never disappears? When the passive income is large enough, you can free up time to focus on other things.
Residual Income
Residual income is described as the income left over after all expenses have been paid. So it is, as it were, a calculation of the amount of money that a person or organization can spend after all bills and financial obligations have been paid. How residual income is viewed depends on the context. See below:
Personal finance
On a personal financial level, everyone has to deal with this when, for example, they want to take out a mortgage. Banks then calculate residual income by subtracting all costs and financial obligation as loan repayments including interest (student loans, credit cards, etc.) from the total income. What remains is then the residual income.
Corporate finance
Within a company, all costs are subtracted from the profit made and what remains is the residual income.
Shares and equity valuation
Residual income, when it comes to stocks, is an economic income stream and the valuation method used to estimate the value of a stock.
The residual income valuation model values a company as the sum of the book value and the present value of the expected future residual income. This figure is calculated by subtracting the cost of net capital from net income.
When one speaks of residual income in the valuation of investments, residual income is the net income that is generated in excess of the minimum return.
Residual or passive income is often defined in terms of a regular flow of money that requires little or no effort. It is then understandable that the two terms are very similar. Ultimately, how passive income versus residual income is defined depends on the circumstances of an individual or company.