Earning is an important part of anyone’s survival. Finding a good job that pays good money is everyone’s dream especially in terms of finding the right financial resource to support a person’s needs. Most often than not, one person does not only work for himself but for the whole family.
With this in mind, it is sure that the value of money that you earn is most beneficial to be prolonged and multiplied as deemed possible.
Just imagine protecting your hard-earned money from being disposed-off unreasonably, you will surely gain the protection that you need for sudden economic dips in the future.
Most often than not, individuals who earn basic salaries end up having no savings at all. Because of the need to support the basic needs of the family, available funds earned from one’s job are often disposed-off easily. The truth is, almost 80% of individuals who work spend their earnings easily to the point that they have nothing left for miscellaneous purchases or for future emergencies.
Does this sound familiar to you?
If it does, then you might as well think of an effective way of handling your finances and make sure that the time and effort you put into earning your money will not go to waste.
Among the most effective ways of earning from your money is through investment. Then again, there is a looming confusion over the difference between the return of investment versus residual income.
In this post, brief descriptions of these two factors of income shall be highlighted in discussion:
What Is Residual Income?
“Residual Income”. Seems a little bit of a complicated term right?
It isn’t really that complicated though. It is still very critical when it comes to knowing how much money you’re really making every month. Residual income is very important when it comes to making loans or making significant investments. So let’s see the real meaning of residual income.
Residual income simply refers to the amount of money from your monthly salary left with you after you’ve paid off all of your personal debts, mortgages, school fees, medical fees, and credit card fees. The money that is left in your pocket after paying for all of these expenses is what is referred to as residual income.
So basically residual income is just that, your residual income that is leftover from your monthly salary after paying for your monthly expenses. The calculation is a little different based on the basis though. If you own a business or service, the calculation of your residual income goes quite similarly, your bills are subtracted with your profits.
As an individual, your residual income is calculated by subtracting all of your financial obligations.
To understand residual income a little deeper, let’s look at its counterpart: “Passive Income”.
What is Passive Income?
Passive income is the type of income you earn on a regular basis with little or no effort at all. Most individuals and corporations make this type of income regularly and its amount is based on their work. Passive income can provide significant security when it comes to setting up a business or service.
Passive income provides a steady cash flow for both individuals and for various corporations and businesses. Passive income quite literally earns you money in your sleep. Thing is, passive income is taxable but is taxed differently from basic active income but of course the tax deductions are still worth investigating and studying before getting into it.
The general difference between the two is the residual income can be passive while passive income isn’t usually residual. Residual income is more used to refer to the income you receive that you keep after you’ve spent most of your monthly income on expenses.
Passive income is usually used to refer to the income you receive on a regular basis based on your profession or the strength of your corporation or your business.
A Closer Look at Your Residual Income Based on Financial Agencies
- How Personal Finance Looks at Your Residual Income
Most banks or brokerage firms look at your residual income as the tool they use to measure if you’re worthy for a loan or opening a savings account. To calculate how much your residual income is, the bank or financial institution subtracts your mortgage payments, school fees, taxes, bank fees, and personal debts with your monthly salary and uses the final result to see if you are worthy of their service.
- How Corporate Finance Looks at Your Residual Income
The process is pretty much similar for corporate finances. Corporate finances refer to residual income as net operating income or profit exceeding its required rate of turn. So basically, net operating income is the residual money left over with the company after paying for its capital costs. The net operating income of corporations is also usually measured by their overall monthly performance and capital investment as well.
- How Equity Valuation Looks at Your Residual Income
Equity valuations also look at your residual income quite similarly. Residual income generally serves as the stream of economic earnings for the equity investment industry. Residual income is also used as the valuation method used for calculating the value of a stock.
The total figure of residual income with equity investments is calculated by subtracting the cost of the net capital from the net income.
So in general, residual income is easy to calculate and is fairly simple to understand. Another thing to consider is that residual income generally becomes larger based on the rate of money you earn. So the larger your monthly income, the larger your residual income is as well.
So before doing or making any sort of financial decision or process it is best to consider your pre-existing residual income.
What is Return of Investment?
“Return of Investment” or “ROI” is basically the performance measure that is used to calculate or check the efficiency or money-making capabilities of a certain investment or is also used to compare the overall efficiency of one investment with another or groups of others. ROI is calculated by directly measuring the return of an investment. Let’s discuss the further details of returns on investment.
What You Need to Know About ROIs
ROI is a profitability tool used to measure how much you can earn from a particular investment. It is the most common way to measure the potential earnings you can get from an investment by comparing it to other similar investments.
ROI is the most common and most popular tool to measure profit because it is very simple and versatile. You can also gauge the profitability of a certain investment using return on investment. Thing is, lots of investors have used ROI’s in the past to make sure that they’re choosing the right options and not blowing their money away on an unsuccessful investment option.
The process of using an ROI is generally easy to understand and easy to get used to. If for example, an investment’s ROI is positive, it is highly likely that that would be a good option to invest in, if it’s negative, then the success rate for the investment would be generally low. So simply, negative ROIs should be avoided in order to avoid bad investments.
As mentioned already, ROI’s give investors the option to look at the effects and results of the investment they are about to take on beforehand.
The Limitations and Downsides of ROI’s
Though ROIs have many benefits and advantages, return on investments has certain limitations. The usual limitation comes with comparing investments. Multi-year investments have certain problems you have to address before using an ROI to evaluate the investment.
If used wrong, ROI’s can be very harmful and can make your investment be very negative and you could end up potentially losing a ton of money.
Assisting Tools for ROIs
In order to use ROIs efficiently, the “ROR” or “Rate of Return” can be used in conjunction with it which basically takes the time frame of the investment into account. This helps make the ROI work more efficiently and makes the result more accurate.
Taking into account the significant effect of the “NPV” or “Net Present Value”, you can get ahead of the changes and differences in the value of money beforehand. This change in the value of money is of course due to inflation which affects the value of all money, including the money that you invested or want to invest.
Knowing all the aspects of investing also helps as a tool in making a successful investment. Knowing the ins and outs of the investment industry. Knowing all of these aspects make investing much safer and make it much more worthwhile in the process.
Having help from a professional investor or experienced relative on your side for your investment journey can also help with your success along with using an ROI of course.
The Yearly Change of ROI
You have to consider the instability of the investment industry and market as well before making a decision when it comes to using ROIs to make good investments. Every year, the ROI average changes due to inflation. Money continuously reducing in value while getting less for more. This should be considered when using an ROI so that your investment does not fair badly and does not end up costing you a fortune.
Since ROI changes yearly, you also have to consider the long term effect this could potentially have on your investment, it may or may not succeed based on this so you have to make sure that your knowledge on the system stays updated because if not, you could potentially end up going bankrupt due to a bad investment that went downhill.
So overall, return on investment can be a very beneficial tool that can help you find the best investment that is suitable for you. By using ROIs, the right way, you can avoid a potentially bad investment in which you could lose your money, and instead you could earn a significant amount of money from a successful investment. So use ROIs wisely in order to be a better and more successful investor.
Earning Residual Income
Earning residual income helps you increase the incoming cash flow in your personal finance. If you are a person who wants to prepare more for the emergencies that may happen in the future, then earning a residual income to add to your financial resources is a critical part of keeping your mind at ease to fill up the savings and extra earning you might want gain.
The Two Main Categories of Income
Income is what is referred to as the money that an institution, business, or program receives in exchange for its products and services. This can be measured by daily, weekly, monthly, and yearly means.
Residual income is only one of the main categories of income, the other category is called “Passive Income”. These two types of income are often mentioned when you’re applying for a loan, making an investment, or paying bills.
Passive income is the money earned from a service that has a small activity going on. Services can earn passive income quite easily because it doesn’t require too much effort on their part. As time passes and your service grows along with the number of regular loyal customers you are getting, your service’s passive income will also gradually increase.
There’s a benefit to this because if you earn enough passive income on a regular basis, you don’t have to worry too much about the work and effort, you can focus on enlarging or enhancing your service to further grow your passive income.
Meanwhile, residual income on the other hand is a little bit more complicated. To put it in general terms, residual income is basically a form of passive income because it can also be earned by certain entities without exerting much effort needed. When looking at residual income from the perspective of personal financing, it may start to look a little bit different. See, banks and financial institutions look at your residual income in order to determine if you’re worthy for loans and similar transactions.
Calculating Residual Incomes through Banks
Banks and financial institutions look at the money that is left with you once you have paid all of your bills, expenses, and personal debts. That leftover money is what they calculate as residual income. Another way that banks and other financial institutions use to calculate an individual’s residual income is by calculating all of their expenses.
These include mortgages, taxes, insurance payments, school fees, and tuitions, and credit cards. They take all of these and subtract them to an individual’s monthly income to determine how much their residual income is.
Calculating Residual Income through Corporate Performance
Residual income is generally the same when it comes to corporate financing, though similar, still a critical aspect in the corporation. Residual income is usually referred to as the company’s “Net Operating Income”. A corporation’s net operating income is the amount of residual income they pertain to after paying all of its expenses and capital costs.
Residual Income and Stocks Investment
When it comes to equity valuations, residual income is used in a tad bit more complicated way. In equity valuations, residual income is used as the method of valuation for calculating the value of a certain stock. Residual income also serves as the earnings stream for the industry of equities.
The figure of residual income when it comes to equity evaluation is calculated by subtracting the cost of the net capital from the net income.
In this case, it is clear that knowing what and how to calculate your or your business’s residual income can be very beneficial. You know how much you earn or keep after spending it on your monthly expenses and with that knowledge, you can know how to better spend your money for the sake of you, your family, and your business.
Ways to Earn Residual Income as an Individual
Now to answer that question, you earn residual income by earning more money than what you’re spending. Residual income is calculated by subtracting all of your monthly expenses and calculating what is left of your monthly income.
So in general, the more money you earn and the lesser expenses you pay, the bigger your residual income becomes.
Talking about money and its lost value along the way, not being able to use the money for its best value can be both frustrating and disappointing especially if you are putting a lot of time and effort into work to earn whatever amount you are earning now.
As an individual, it would be rather beneficial to understand different ways by which you can earn some residual income to add to your primary source of earnings. Here are some ways you can earn residual income as an individual:
ONE: Investing in GICs and Bonds
The good thing about investing in financial instruments is that they present lower risks and are sure to give you regular income within the same target time every month. It’s more like letting organizations borrow your money in a form of investing on their bonds, and they pay you regular interest within agreed intervals for as long as you let the company use your money.
Given that it is a safe form of investment, you will also recognize the fact that profiting from this option comes in small amounts of rewards. This means that if you opt to invest in GIC and bonds, you should not expect to earn a lot in a short span of time.
Nonetheless, it does give you a regular source of residual income every month.
TWO: Invest in the Stock Market
Instead of merely letting your money be borrowed and used by businesses, for the time being, investing in the stocks market takes a riskier approach as it will involve purchasing and reselling company stocks depending on the allotment of time.
If you do not wish to sell your stocks, you may also opt to get dividend payments from stocks you bought.
True, earning from the stock market offers greater rewards than that investing in bonds and GICs. Nonetheless, it also offers higher risks especially when it comes to buying and selling stocks and dancing with the fluctuations of the economy to make sure you earn more than what you lose in the process.
This approach requires that you give more time and effort in terms of observing the behavior of the stock market to understand your next move.
THREE: Rental of Properties
Do you have a house or a property that you can let other’s rent for a fee?
This can come in different forms of properties. Usually, they are tangible and are easily offered up for rent. Others have homes they can offer to be rented out to tenants. Others have that extra space they can spare for those who might want to create business that can be operated in the area.
Depending on the space you are renting out, its location, and its condition, you can set the price of the rental fee. Note though that if you choose this option, you also recognize the fact that it is more of operating a business than merely investing and waiting for your money to arrive.
In order to keep the value of your property high and make sure that it will be amicable for the tenants to pay for the amount of rent you scheduled, you need to make an effort to maintain your property. For instance, if you are renting out a van or any type of vehicle, you are responsible for cleaning it and preparing it for the next person who will rent it.
FOUR: Get Paid for Royalties
Are you a creator? A writer, an artist, a designer, a photographer, and any other individual who let their work be used or bought by others often earn from royalties such as copyright.
For instance, you have captured a photograph that you have copyrighted and posted online. In order for others to use your photo, you can set a price of the royalty value that the work should be paid for.
You can control this pricing if you are going to set the very system that will be used to showcase and distribute your work. However, in many cases, artists and other creators showcase their work under another management who will then be responsible for collecting payment from those who will buy or use their work.
FIVE: Earn from being an Affiliate Marketer
You may not have your own products, but you have the capacity to market products online and get people to buy these items. If you have this capacity, then you can try and earn from being an affiliate marketer.
This means that as you promote a product online, you earn the right to receive an agreed percentage from whatever sales are made from your marketing efforts.
This is currently one of the most popular ways of earning residual income online.
SIX: Consider Fractional Investments
What if you want to invest but do not believe that you have enough funds to support the investment you want to secure?
You can consider investing in fractions.
Instead of putting all your hard-earned money in one investment policy alone, you pick several policies and put your investment in smaller fractions in each policy. This will allow you to earn from all these investment policies all at once.
Given, the money you earn from each policy may be considered small, at some point even insignificant at first glance. But since you earn in fractions at one time, putting together all the return of investment you earn will certainly present the overall amount you can earn in a month, which surely would not be that bad considering that it is just a residual income.
Earning money is not easy. Then again, it is a necessity.
But there are other ways for you to earn a good income without necessarily having to break your brains and bones all the time. For many individuals today, earning a good residual income has provided them the liberty to live the lives they have always wanted.
This is what a good choice of making or earning residual income regularly is all about.
If you play your cards right, investing and earning residual income on the side may even give you that option to live life more freely to the point of maybe deciding to live your 9 to 5 work life and concentrate more on wisely managing the financial resources you have right now and earning a good residual income on the side.