Difference between Passive Income and Residual Income
Basis |
Passive Income |
Residual Income |
---|---|---|
Source |
It often comes from assets you own or work you’ve already done (rent, royalties, investments). |
It is what remains after paying your bills, and can come from your job, savings, or even passive income. |
Effort |
It requires upfront work, but then earns with little to no ongoing effort. |
It depends – your main income needs work, but saving money or investing your residual income can be more passive. |
Focus |
Passive income is about building income sources. |
Residual income is about managing your spending and earning more overall. |
Risk |
It varies – some options are riskier (stocks) than others (rent, if reliable tenants). |
Itself is low-risk, as it’s money you already have. What you DO with it determines the risk. |
Timeframe |
Passive income often has a longer start-up phase, requiring upfront work to establish. Once set up, the income flow may become more consistent. |
Residual income is more immediate and tied to your current income and expenses. Changes in either will directly impact your residual income. |
Stability |
Passive income sources can vary in stability. Some (like dividend stocks) are more reliable, while others (like creative ventures) may fluctuate. |
Residual income is reliant on your primary job’s stability. Job loss significantly impacts residual income. |
Scalability |
Passive income has great potential for scalability. A successful digital product can be sold many times over, increasing earnings with minimal extra work. |
Residual income is less scalable than passive income. It’s typically tied to linear increases in your main job’s pay or reductions in spending. |
Tax |
Passive income is taxed differently (sometimes favorably) by the IRS compared to regular earned income. Research the rules carefully for your specific situation. |
Residual income, being leftover money, has already been taxed based on where it came from (job, investments, etc.) |
Examples |
Renting a property, stock dividends, selling an online course you created. |
Getting a raise, cutting back on entertainment subscriptions, earning bank interest. |
Best Option |
Passive income, once established, then boosts your residual income even further. |
Residual income gives you the ‘seed money’ to invest in creating passive income streams. |
Difference between Passive Income and Residual Income
“Residual Income” and “Passive Income” are two important concepts when it comes to personal finance. Passive income takes upfront work, then less ongoing effort. The key is that you make money on an ongoing basis, even when you’re not actively working. Residual income is the money you have left over after paying all your necessary bills and debts.