With the cost of living crisis affecting everyone that doesn’t earn a good wage, people are learning other ways to give themselves more financial stability. If you are one of those people, you may have also come across residual and passive income.
Understanding the difference is not difficult although it can get confusing for those who haven’t come across the terms before. Once you understand the difference between the two, you will then know what you want to do.
A quick summary would be that a passive income is where you earn extra money with little effort. Residual income isn’t an additional earning. It is where you calculate how much money you have left once you have paid all your bills and other essential expenses.
Passive income requires a bit of time and investment as well. The more money you invest in your passive hustle, the more money it is likely to return. There are many skills that people have that they use to help earn a passive income however, there are some things that require no skills and just a little investment to get the ball rolling.
We will look at the differences between passive and residual incomes. Including the different ways, you can earn extra money on the side.
First, we have passive income and this is what you mean when you say you want to earn extra money. This passive income is going to be your side hustle. A side hustle that can earn you extra money each month and takes up little time.
With a passive income, you will likely need to put down an investment. For example, to gain an extra income, you need to invest your money, a bit like a deposit. It is money that can then be used to earn even more money.
Some people offer this as a service. What they will say to you is that you need to give them money that could potentially double your profits. However, one thing you need to be wary of is scammers when it comes to giving your money to someone else. You may have seen this a lot on social media as well. Random people would message you, asking for money and guaranteeing you double the money you initially gave them.
The HMRC and IRS say that a passive income is when you invest in assets instead of working in a trade or business.
Some people are so successful with their passive income that they are earning enough money to quit their day job and free up more time, freeing up more time in their lives. Passive income can sometimes be risky and the more reward you want from it, the more investment you have to put down.
If you are successful with your passive income, it can give you a lot of financial stability. If you ever get to the point where you are earning enough income that you can quit your job, you are doing well in life.
Nine times out of ten, you probably won’t earn enough money to quit your day job. Nonetheless, the extra money can be great for those expensive months when you have a few birthdays you need to pay for.
Different Types Of Passive Incomes
There are several ways to earn an additional income no matter what country you live in. You will be amazed at what you can do on the internet as well. Furthermore, a lot of people will spend a lot of time on their passive income so it returns more money. If you know you have spare time to make more money, we would advise you to spend that time earning. Especially during a cost of living crisis. Here are several ways to earn more money without overworking yourself throughout the week.
The first passive income that we suggest and the lowest risk out of them all is a savings account. Savings accounts have more interest than a current accounts. Plus, it is a place to put away any extra cash that you may own.
There are several types of savings accounts. If you wish to spend money from your savings, we suggest a spend and savings account. It allows you to put money into your bank account, gain interest and spend it. However, when you spend money from your savings for one month, you will lower your interest for that month.
Before opening a savings account, we suggest you get a lump sum of money before you open your savings. For example, if you open a bank account with £500, you will gain an additional £5 if the interest rates are at 2%. That doesn’t seem a lot but it adds up over time. Don’t forget the odd months when you put a lump sum in because you have spare cash for that month. If your goal is to keep topping up this account then we suggest you set up a savings account.
Robo-investing is something else to invest although there is more risk for this type of income. It is when you use an app with your current account linked up with the app. When you go buying items, it will round up and use that money for savings. For example, when you buy something for £2.70, it will round it up to £3, using 30p for savings. This money is used to invest in stocks which will have a much better interest rate than a savings account.
The stock market is one of the most common passive income methods people invest in. The younger generation does this more than the older generation because there are several apps you can use to invest. Moreover, this is much riskier than Robo-investing which is why many people avoid it.
Investing in a stock is risky if you do not understand the market. Some businesses will increase in value a lot around Christmas time and others won’t do well.
Some people invest in the stock market as their full-time job. They will wait until the market opens, trade for seven hours and is done for the day.
The stock market can be highly volatile at times which is why it is such a risk. Nonetheless, the higher the risk, the higher the reward. There are a couple of ways you can ensure you are not risking too much money with a stock. One method is investing in multiple long-term stocks. These stocks are the ones which are guaranteed to increase in stock value over time such as amazon, Tesla and other companies. These are known as blue-chip stocks.
Other stocks you can invest with which have a higher risk factor than usual are penny stocks. If you have ever watched Wolf Of Wall Street, you will know what we are on about. These penny stocks are low value but due to the interest, the value of the stock increases dramatically. Nonetheless, there are many sceptical stocks in the market, leading to you losing your money. Get in contact with an investment fraud lawyer to see if you can recover any of your losses.
Residual income can also be a passive income although it can mean other things depending on the context.
For personal finance, residual income is when you calculate how much money you have left over after your bills and other expenses have been paid out. It is used to find out whether or not somebody is worthy of a loan.
A good example would be banks. They will calculate the residual income of an individual to see if they can afford a mortgage on a house. When calculating this, they will look at the cost of living in the area they wish to move to as well. To do this, they will take property insurance, tax, mortgage costs, and other regular payments away from their monthly wage. The leftover money is considered residual income and doesn’t include food and utility bills.
Residual income for corporate finance is different to personal finance. It is on a much bigger scale for a company that wishes to assess its capital investment. This is carried out in a similar way to personal finance, they calculate the expenses that come from the company and the bills they need to pay.
Residual income for equity valuation is a method to estimate a stock’s value. It is the sum of book value and then predicts the potential residual income. The equity valuation for residual income is calculated by taking away the net capital from the overall income.
There is a big difference between passive and residual income but to summarise. Passive income is money you earn on your side and isn’t usually your primary job. Residual income is the money left over from your monthly/weekly salary once you have paid your bills and other regular expenses that may come out in a month. There are many ways to manage your money effectively so make sure are prepared this winter.