_ Distinguishing Between Passive and Residual Income
_The idea of making passive income is just magical to me. The suggestion that I can simply lie around and do essentially nothing and earn money at the same time just seems so great that it ought to be illegal. And somehow, people are doing it every day, and with no repercussions. To be honest, people have been doing this for years - decades, actually.
residual income
First of all, we most likely need an understanding of what passive income is. The truth of the matter, however, is that almost everyone has their own definition of the term. On my part, I like to think of passive income as income that does not mandate that the earner have an active role in revenue generation. That's not to say you have no role (although you may not); it's just that daily participation can be limited.
By way of example, consider a pilot who has to fly from Los Angeles to New York. Prior to leaving, he is totally occupied with handling the plane, going down the runway, and so on. However, once the plane is in the air, he can set it on automatic; the plane only really requires his attention at takeoff and landing. (In other words, setting the autopilot let's things go into "passive" mode.) Likewise, there is limited involvement (and frequently none) by the individual making the money in passive income activities.
Also, while I often use the terms interchangeably, this is slightly different than residual income. Residual income usually refers to income being generated by some initial work effort, but which does not require continued participation by the income earner. A good example of this could be writing a book or a song. The initial creative effort will yield on-going revenue without the writer having to do anything else. Thus residual income actually can be seen as a type of passive income. (Dividends - which I was referring to in the first paragraph above with respect to earning passive income for decades - can also be seen as residual income.)
In short, passive income may actually demand a little work. Quite possibly, the income earner will need to "check in" occasionally to ensure that everything is fine - the exception being if you are earning some type of royalty such as in the example noted. Regardless, it still comes out way ahead of the the other option - "working" - by a country mile. And then some.
passive income
residual income
First of all, we most likely need an understanding of what passive income is. The truth of the matter, however, is that almost everyone has their own definition of the term. On my part, I like to think of passive income as income that does not mandate that the earner have an active role in revenue generation. That's not to say you have no role (although you may not); it's just that daily participation can be limited.
By way of example, consider a pilot who has to fly from Los Angeles to New York. Prior to leaving, he is totally occupied with handling the plane, going down the runway, and so on. However, once the plane is in the air, he can set it on automatic; the plane only really requires his attention at takeoff and landing. (In other words, setting the autopilot let's things go into "passive" mode.) Likewise, there is limited involvement (and frequently none) by the individual making the money in passive income activities.
Also, while I often use the terms interchangeably, this is slightly different than residual income. Residual income usually refers to income being generated by some initial work effort, but which does not require continued participation by the income earner. A good example of this could be writing a book or a song. The initial creative effort will yield on-going revenue without the writer having to do anything else. Thus residual income actually can be seen as a type of passive income. (Dividends - which I was referring to in the first paragraph above with respect to earning passive income for decades - can also be seen as residual income.)
In short, passive income may actually demand a little work. Quite possibly, the income earner will need to "check in" occasionally to ensure that everything is fine - the exception being if you are earning some type of royalty such as in the example noted. Regardless, it still comes out way ahead of the the other option - "working" - by a country mile. And then some.
passive income