Working hard to earn money today is great, but one of the most important concepts to understand if you want to create long-term wealth (that won’t require you to work at a day job forever to earn a paycheck) is residual income and how it differs from active income. The most successful long-term wealth strategies use active income today to create residual income for the future.
Active Income
The work you do today to earn your paycheck is your active income. It could be income earned from a corporate or other job where you get paid wages and salaries at regular intervals, or if you’re self-employed it could be the work you put in to earn money within your business. Once you stop working, the active income stops too.For many, the solution is to save up small amounts over time through financial planning tools like a 401k or individual retirement account, earning interest on that income, then drawing on that money after you stop working.
One challenge with this approach is that there are a lot of unknowns. How much money will you need? What will the cost of living be in the future when you retire? How long will you live after retirement, and how long does your money need to last? What will the stock market do in the meantime to your total nest egg? Another challenge for many people are financial constraints that make it hard to set aside enough now to provide a comfortable income later.
Residual Income
Residual income (also sometimes referred to as “passive income”) is money that you earn even after you stop actively working. Some examples of residual income include royalties on music, books, or movies, or rent payments from tenants in a building that you own as a landlord. It could also be money that you earn from a successful business that continues to earn money even after you step away from participating in day-to-day operations.
Benefits of Residual Income
One of the primary benefits of residual income is, of course, that you won’t need to work at your current 9-to-5 job until the day you die just to earn enough money to pay your bills. Earning residual income can allow you to comfortably retire and do the things you have always dreamed about without wondering whether you will be able to afford it, or whether you will run out of retirement income eventually and have to drastically adjust your lifestyle. It provides you with the freedom to travel, pursue new hobbies, volunteer your time, or even start a second career that you never pursued before because it didn’t pay enough.
To earn residual income, you must invest in something that has the potential for long-term value. Find out how Life Outside the Boss can help you start building your dream of residual income and secure your financial future.
