The Beauty of Residual Income

Posted by under Business, Investing, Personal Finance . Updated: August 8, 2020

There are two types of income, active and passive.

In simple terms, active income is when you work for the money, while passive income is when money works for you.

These are the most popular terms used in financial books and articles. And of course, it’s always emphasized that you should build passive income if you want to become rich.

However, there are alternate terms for these two types of income, which I like better – linear income and residual income.

Active income is a linear type of income. You work, then you get paid, and then the process stops.

Meanwhile, passive or residual income is when you work, then you get paid, and the process can repeat itself, which allows you to get paid over and over again.

residual-income

I like this concept of income better because it’s a more realistic definition.

Having a job or being a freelancer, earns linear income. You get paid only once for the work that you’ll do.

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Meanwhile, having investments or owning a business, earns residual income. You only need to work once, and you can get paid for your efforts again and again.

By remembering this, I can now ask myself if a particular work is worth doing, and it helps me prioritize the ones which will bring me residual income.

Early this year, I decreased the seminars and workshops that I conduct; and then increased the time I spend growing my existing businesses.

Holding seminars and workshop are linear income for me. It’s a one-time income deal.

However, by focusing on my current businesses, I’m creating residual income because the work I’ll exert will bring cash to my pocket over and over again without any more work required on my part later on.

I’m not saying that active or linear income is bad, and should be avoided. What I’m trying to say here is that if you were given a choice, choosing work that produces residual income should have more weight in your consideration.

Different Sources of Residual Income

Do you want to increase your residual income? Then here are some of the things you can work on:

  • Royalty income from intellectual properties as an inventor, author, etc.
  • Portfolio income from paper investments such as stocks, mutual funds, etc.
  • Rental income from real estate properties
  • Sales and dividend income from businesses

If all you have right now are linear types of income, then it may be time for you to create sources of passive or residual income because this is the fastest way to become financially free.

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9 Responses to “The Beauty of Residual Income”


  1. billions838 says:

    Earning residual income is the best and you can pass it on to your future generations and making it as a legacy.

  2. Pangit says:

    nice article. Great Fritz and More power!

  3. Rose says:

    Another great post.

    I hope you’ll write about donating (whether cash/in kind).

  4. DR. NORMA DE JESUS-HAMOY says:

    I am interested to join your webinar but what if I miss a session?

  5. Very nice! I’m no financial guru like you, but I think the term “passive” does have the danger of sounding like you’re doing nothing to earn money. While it may be true, at times, maybe it’s not the best idea to somewhat promote laziness. Hehe. “Residual income”, on the other hand, has a more motivational tone. As a programmer, your definition of it also makes me think of the term “iterative”. 🙂

  6. Heide says:

    I never really thought of passive income as residual income. That’s one good way to put.

  7. charles peralta says:

    This gives me a new meaning or understanding about active and passive income. Thanks Fitz for this article.

  8. Thanks for this, Fitz! I started network marketing two years ago and affiliate marketing three years ago. Both seem to take a lot of work, but create residual income. I love blogging though, so it is something that aligns with my beliefs. Great work, keep it up!

  9. Jack says:

    Fitz, I appreciate your new terminology for what I had been calling active & passive income, really cool way to label it. I am thinking my investing income is actually a hybrid? One example for discussion is: I own a fairly large position in an old line telecom that pays a sweet .52 cent USD quarterly dividend as I type this. I do not take the dividend in cash, rather it goes to DRIP (Dividend Reinvest Plan). The day after the divy is paid, my brokerage firm purchases the amount of the dividend in new shares for my account. The value of the position grows and the dividend increases both from the annual increase and from the increasing number of shares I own.

    For years, this was a great way to set things up as there were no commissions on the reinvestment. A true set it & forget it deal. With zero commissions the norm, it may well be better these days to purchase your stock the day after EX-dividend date if you have free cash to do so. Then you pay yourself back on dividend pay date. The reason is that most of the time, stocks take a dip on the EX-date because that much value just came out of the company and will soon be in shareholders pockets. You may usually purchase the stock for less on the EX-divy date than after pay date when the price is usually higher in a rising market.

    Where I mainly deviate from passive investing is with my with WEEKly call selling. I actually have to get out of bed at night when the US markets are open to select the option strike I wish to sell and place the order. You can sell one call option for each 100 shares that you on. You have just done an “overwrite”of your stock and created a covered-call trade. Then, at the end of the week I again must check on the position and decide what outcome I want.

    The option may be OTM (Out of The Money) and can be allowed to expire worthless or you may roll out to next weeks contracts on expiration Friday. Your option could also go ITM (In The Money) and you now must choose whether it is best to allow assignment (get called away) and start a new position or if you should do a roll-out. Markets can go up, down or sideways so it is time to follow your trade plan. Rinse & repeat week after week. It only takes a few minutes for each position but this is no longer a truly passive or residual income. Still, I fully believe it is well worth my time to do this as we harvest many times the dividend amount in option premium each year! Am I working “a real job” or am I just having a heck of a lot of fun, YOU DECIDE.

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