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You might have come across the terms passive and residual incomes. Both incomes are quite similar but different at the same time. Due to this reason, it can be quite confusing.
This is why we have developed a detailed guide for you to understand the major differences between the two. It can help you organize your finances easily.
Let’s take a look into the differences.
By the end of this post, we’ll cover the following topics:
- Unique differences between passive and residual income
- Which income should you choose?
Without further ado, let’s get started.
6 Major Differences Between Passive and Residual Income
Before we explain the differences, you need to understand what passive and residual income is. This way, you can perceive the differences easily.
A passive income is an income obtained through sources without your active participation. It can either be a digital or a physical source. For example, monthly rent on a property or income obtained from stock dividends.
On the other hand, a residual income is an income that is left after you deduct all your expenses. In some situations, you can also call it net income.
Can a single income be both, passive and residual?
It is important to note that both incomes are intertwined. Even though every residual income can be categorized as passive income, not every passive income is residual.
For example, the monthly rent you get is passive income but it can’t be categorized as residual income until you deduct expenses.
With that out of the way, let’s check the differences in detail:
1. Use of Income
The main difference between the two incomes is their purpose and utility. Passive incomes are used to support personal finances and improve financial conditions.
Whereas, residual incomes usually have a business aspect associated with them. Residual incomes are used to assess the profits and margin for spending.
What sort of businesses use residual income?
In most cases, residual income is used by corporate businesses. It helps them pay dividends, boost their profits, or just simply write off their taxes.
For an individual, residual income is anything that is left after monthly billing and expenses. It can either be from an active or a passive income source.
2. Source of Income
Next up is the difference in source for passive and residual income. Active and passive incomes are two separate categories. Residual income is a sub-category for both.
Let’s take an example.
The residual income is what you get after you pay the bills for domain services or hosting services.
If you teach these courses, this will fall under the active income category. The leftover after expenses will be your residual income.
As you can see from the above example, residual income is irrelevant to the source. It doesn’t matter if it’s active or passive income.
3. Risk Factor
Another difference between the two incomes is the risk factor. Passive income usually has a varied risk factor that depends on its source.
What is the risk factor for residual income?
For residual income, the risk factor is always low. This is because residual income always has major expenses deducted from it.
From a financial aspect, you can even turn your residual income into a source of passive income. This way, you are always sure what you will get.
4. Ease of Access
The aspect of access is also a major difference between passive and residual income. Passive income usually requires you to invest resources upfront.
These resources might include your time, money, or a particular set of skills. Without it, your chances of earning any passive income are quite slim.
For example, suppose you want to earn passively from an online merch store. In order to do that, you’ll have to create merch designs, develop a store, and target an audience.
How easy it is to earn residual income?
As far as residual income is in question, it is quite easy for you to earn it. You can become a content writer or proofread materials for different parties.
In order to earn residual income, you don’t need to have any prerequisite parameters.
When it comes to how easily you can use both incomes, residual income stands out. More than often, passive income is quite hard to utilize.
It is mainly because even after you obtain, you still have to deduce your expenses. This can take a lot of time to plan out.
What about the utility of residual income?
You can utilize any residual income as soon as you get it. The reason behind it is the deduction of major and minor expenses.
You don’t have to worry about managing the details. Once you get it, it is all yours to spend.
This can come in handy in a lot of situations because you are sure of your financial condition.
6. Number of Options
As we have already mentioned, the difference between the access of passive and residual income is quite varied.
This also applies to the number of options you can explore to earn both incomes. Passive income options are limited and hard to get into.
On the other hand, you can earn residual income from just about anything. You can simply just manage your monthly finances and squeeze out some residual income.
Which Income Should You Choose?
The answer to this question solely depends on your personal preference. While residual income is safe and easy to earn, there isn’t much room for growth.
Wrapping Things Up…
This brings us to the end of our post on key differences between passive and residual income. We hope the aforementioned information proves to be beneficial for you.
Passive income and residual income are two sides of the same coin. Both are used to improve finances and require minimum participation on your end.
Feel free to reach out in the comments if you have any questions.