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Residual Income: Everything You Need To Know

Hanna Kielar5-Minute Read
April 02, 2021

Learning how to properly balance your finances can be tricky. Over time you build a strong awareness of how much money you need to set aside for your required monthly expenses, but it can be easy to end a pay period with little money leftover if you aren’t careful with your spending.

If you ever feel as though you’re caught in a cycle of living paycheck to paycheck but aren’t sure where all of your money could possibly be going, it might be time to more deeply examine your spending habits with your personal residual income.

Let’s define residual income and dig into why it’s important, how it’s calculated and how to start increasing your residual income streams.

What Is Residual Income?

Residual income, often referred to in personal finance as “disposable income,” is the amount of money an individual has left over within a certain pay period after taking care of any financial responsibilities they have. Such responsibilities may include bills, contributions to investment accounts and debt payments.

Having access to more funds after paying off your necessary expenses can be helpful for a number of reasons. It can help you live more comfortably, make it possible to put more aside into a savings account or in new investments, and even signal to lenders that you’d be able to handle monthly payments on an additional loan. That, of course, would only increase your likelihood of getting approved.

Residual Income Vs. Passive Income

While these two terms are often used as though they mean the same thing, it’s important to understand the difference between them. Residual income can be earned passively – meaning the person earning the money has already put in the hard work upfront and is now making money off of their endeavor with little continued effort – but not all passive income is residual.

Many individuals with passive income streams use the money they earn to help pay their bills or to pay down debt, so it doesn’t always contribute to their pool of residual funds. That said, there are plenty of individuals who don’t need to use their passive income streams to assist with their required monthly expenses. Instead, these people might solely use their passive income to boost the amount of residual income they have access to each month.

How To Calculate Residual Income

The amount of personal residual income you can access at the end of each month can be calculated by subtracting your required monthly expenses from your total monthly take-home pay.

Let’s say, for example, you take home roughly $2,800 a month at your job. Your monthly expenses include:

  • $1,000 mortgage payment
  • $600 in student loan payments
  • $300 car payment.

To calculate your typical amount of monthly residual income, you would subtract your total monthly expenses of $1,900, from your monthly take home pay of $2,800. In this example, you would be left with $900 each month for other expenses like groceries, gas, new investments and more spontaneous purchases like entertainment or your favorite takeout treat.

How To Make Residual Income: Three Earning Methods

There are many ways to increase your residual income, but let’s take a look at three of the most common and effective methods used by individuals to boost their access to disposable funds each month.

Renting Out Real Estate Properties

If you own more than one piece of real estate (maybe you’ve got a vacation home) and you find that your non-primary residence is going unused for a significant portion of the year, renting it out can be a simple way to add funds to your residual income pool.

Lodging websites like Airbnb or Vrbo allow you to market your property with ease to travelers in search of temporary accommodations outside of a hotel or hostel. If you’ve already taken the time to ensure that your property has all the modern amenities that guests might expect, and if you’ve put in the effort to give the space aesthetic appeal and properly clean it between each booking, you’ll be far more likely to attract a steady stream of customers. And if you’ve got a carousel of guests booking your property, you’ll consistently boost the amount of residual income you have access to each month.

Blogging

While writing content for a blog isn’t the most passive avenue for earning money, don’t count it out if you’ve got a flair for writing or influencing. As successful blogging typically requires consistent production of high-quality blog posts, this can be another great way to increase your residual income if you’re willing to put in the work. Once you gain a steady following, your blog can be monetized in a number of ways, including through AdSense ads and sponsored collaborations with brands.

Affiliate Marketing

Affiliate marketing involves promoting a product from a given brand on your website or other social media platforms and earning a commission on purchases or clicks made using your promoted link to that product. If you’re already a successful blogger or have achieved “influencer” status on Instagram, affiliate links can be a useful way to both share products you genuinely love with your followers and increase the amount of residual income at your disposal.

For more ideas on how to earn money passively, read the article on Rocket HQSM about 19 sources of passive income here.

How To Manage Your Residual Income

While increasing your streams of residual income can make it a lot easier to live comfortably, the temptation to overspend the extra money you’ll now be making can be too great for some consumers. Before deciding how you want to go about expanding your access to more disposable funds, it can be helpful to create a budget that takes into consideration how much added residual income you would potentially be making through a given earning method, and where specifically that money should be going.

Write down some of your long-term financial goals – for example, do you want to buy a house? Pay off your student loans in full? Go on a vacation to Europe? Start a college fund for your children? Save more aggressively for retirement?

Once you’ve identified what you want, complete some rough calculations for how much more money you could theoretically put toward these goals depending on the level of success you have in your diversified income streams. Establishing set purposes for how that extra residual income is going to be used will make it easier to achieve your goals – and to curb any wasteful spending habits. You deserve to spend your disposable funds the way you want to, of course, but it’s always wise to work on building healthy financial behaviors that will make life more enjoyable for your future self as well as your present self.

The Bottom Line

Finding ways to earn more residual income can be extremely beneficial for those who want more wiggle room in their budget each month, and for those with financial goals they’re hoping to achieve.

However, it’s important to still try and make responsible choices with these added funds. You work hard to make money, and you should get to spend a portion of it on things you enjoy – but your future self will thank you for striking a financial balance and making plans with your money that’ll set you up for success in the long term.

Have other questions about ways to earn more money? Read Rocket HQ’s article on maximizing your earning potential here!

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    Hanna Kielar

    Hanna Kielar is a Section Editor for Rocket Auto℠, RocketHQ℠, and Rocket Loans® with a focus on personal finance, automotive, and personal loans. She has a B.A. in Professional Writing from Michigan State University.