What is the Difference Between Residual and Passive Income?
Before we discuss residual income, let me clarify the misunderstanding that has been created by the term ‘passive income’. The terms ‘residual income’ and ‘passive income’ have become interchangeable but there is a subtle difference. From a marketing point of view, the term passive income is very seductive as it equates to “No work”, “No brainier”, “Easy”, “Just sit back and relax and money will come rolling in.” People get excited and join a business opportunity thinking that there is no work involved. They get disillusioned when they find that income is not passive after all.
Nothing can be further from truth. To create residual income, there can be a huge amount of time and effort required. It may take an author months or years to write a book. There is no income upfront. But once the book is published, royalties from it can flow for years to come giving passive income.
Residual implies that some work must be done before you can reap the rewards for years. There is no such thing as “100% passive income.” Every income stream you create will require some effort initially and also some maintenance to sustain it as passive income. You must keep these two work factors in mind before embarking on creating a residual income stream. So you have to roll up your sleeves and get to work to start a residual income stream.
The good part is that once you have created your residual income stream, it will create a full-time income for you with very few hours of work each week. There was a point in my life when I took a decision: I will not devote a single hour of my time in generating linear income to make someone else rich. This is the best decision I ever took in my life.
Someone rightly said, “Wealth is not a material gain, but a state of mind.” It took me several years of financial education to gain the state of mind that prompted me to stay away from the pitfall of linear income and focus only on creating passive income.
You will need some involvement in management of your assets, although it may not require day-to-day direct involvement. The trick is to put systems into place to minimize your time involvement even if it comes at a slight price. Your free time is the most precious commodity that will not only improve the quality of your life but also help create additional income streams.