Copyright

What Is Residual Income? - Definition, Model & Formula

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: What is Retail Selling? - Techniques & Process

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
 Replay
Your next lesson will play in 10 seconds
  • 0:02 What is residual income?
  • 1:30 How is residual income…
  • 3:39 Lesson Summary
Add to Add to Add to

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Log in or Sign up

Timeline
Autoplay
Autoplay
Speed

Recommended Lessons and Courses for You

Lesson Transcript
Instructor: Tara Schofield
Residual income is a highly attractive way to earn money. This lesson discusses two definitions of residual income and gives many examples of how residual income is earned.

What is Residual Income?

Residual income can have two different definitions or applications. The first definition, a less common application of residual income, is the money that is left after monthly debts are paid. This calculation is particularly important when a person is seeking financing or a loan based on their income and available money to cover the additional debt. In this scenario, the residual income is calculated by this formula:

Residual Income =Monthly Net Income - Monthly Debts

This calculation takes into account a person's take-home pay and subtracts debts and expenses from that amount. The remaining amount is the residual pay. The remaining money can be used for any other expenses.

The second way that residual income is defined is money that is earned on a continual basis that is often based from one original activity. Often this type of residual income is referred to as passive income. Earning residual income is a critical aspect of compensation for many salespeople, artists, and musicians.

Some perfect examples of residual income include:

  • Rental income from a home, apartment, or commercial space
  • Royalties earned for creating intellectual property like books, recordings, music, photographs, movies, television shows, etc.
  • Subscription services including media, online, or ongoing services
  • Interest earned on savings or loans made to others
  • Ongoing income such as retirement, alimony, disability, etc.

How is Residual Income Relevant?

The first form of residual income, the leftover cash after bills and expenses are paid, is important when a person is growing their savings account or is seeking a loan or financing. When getting a loan, there must be an adequate amount of residual income available to ensure a person has the money to make the loan payments each month. If there is not adequate residual income, financing or loans will not likely be approved.

The second form of residual income, passive income, is often a vital part of wealth creation. There are only so many hours in each day, and when a person trades hours for dollars, there is a maximum amount of income that person can earn. For instance, if a person earns a specific amount each hour, there is a limit to how many hours are available to work. Once they reach that maximum amount of time, they cannot earn more money.

To unlock this lesson you must be a Study.com Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back
What teachers are saying about Study.com
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 160 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create An Account
Support