How To Build Residual Income

Although residual income can be used to describe the sum of money you continue to earn after doing upfront work, it mainly refers to the net income you get after covering your expenses and debts.

You might have heard of discretionary income, which is money that you can spend at your discretion. Residual income is the same thing.

Most people get paid when they trade time for money, meaning there's active work involved in generating that income.

But there are many residual income opportunities that can make you money with little effort on your part.

Talk about working smarter!

By creating streams of residual income, you can increase your wealth and gain control over your finances.

Types of Residual Income

Residual income can have different meanings in different contexts. Here's a look at some of the common areas that make use of this income.

Corporate Finance

Residual income is how you calculate profit in the world of corporate finance.

You can use it to identify a company's net worth by subtracting the opportunity costs of capital from the annual operating profit.

And if you want to know the company's equity value, you can use residual income to estimate the instinct value of its shares.

For this purpose, you'll assess the company based on the sum of its book value and the current value of its anticipated future residuals.

Personal Finance

You can also use residual income to determine your creditworthiness.

Banks and other institutions often use this income to determine whether an individual is making enough to secure a loan and cover his expenses. So if you're left with a good chunk of money after settling all your debts and monthly payments, you can demonstrate your financial standing to get approved for a loan.

Online Business

If you set up an online business, your residual income will be the profit you make after putting in the initial effort.

Typically, there's very little work required to maintain the flow of income after the initial effort is made. Hence, in the context of online business, residual income is also referred to as passive income.

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