Define:Residual Income

     Another major concept you must fully understand in order to become wealthy is the idea of residual income.  Everyone is familiar with the concept of earned income.  Earned income is the type that you work for.  Most people, though, believe that this is the most common type of income though, and it is… for the masses.  Individuals that become truly wealthy though, know that only through residual income can they achieve financial freedom.

     The reason that residual income is so powerful is that it leverages infinite resources while earned income leverages only those resources – time – that you can bring to bear.  For example, let’s say that you have a great job that pays you a very high hourly wage.  The problem is that, no matter who you are, you have only been granted a finite amount of time to earn that wage because everyone only has 24 hours in a day.  Even should you work 24 hours a day, 365 days a year, your earned income would have a ceiling – a maximum amount that you can earn.

     Residual income, on the other hand, is much more powerful than earned income, because it pays you even when you aren’t working, or after you decide to stop working.  It pays you when you are sleeping, injured, lying on the beach, or retired on the golf course.  Residual income can be created many ways, and typically, it is broken down into two classifications – investment income and royalty income.  Investment income is the type that pays you based on a principle investment.  This includes bank savings, IRA’s, stock investments and real estate investments.  Royalty income is the type that pays you long term for work that you perform in the beginning.  Some examples are royalties earned from writing a popular song, book or movie.  Individuals that earn royalty income typically put the time in at the beginning in order to have an asset that pays them for years or decades to come.  Residual incomes can be very large or very small, but regardless of the size, it is very powerful as it will continue to pay off long after you stop working, become injured or retire.

     Many successful companies leverage residual income in order to create stable profit stream that can be easily forecasted, regardless of sales efforts.  Some examples are cell phone companies, cable companies, insurance companies, or any company that you pay on a monthly basis for their product.  Companies that are strictly service based entities can’t create a residual income as their profits are solely driven by sales and manpower efforts.  Should sales stop or the servicing individuals not be available, then the profits for the company deplete.  My company, Blue Ribbon Technologies , has a very effective residual income model.  While we spent years investing in the development of an internet based document management application, now we are able to sell the application to any customer once, and they continue to pay us for keeping the servers that host their documents up month after month.  Other than customer support issues and basic administration, we are able to have a stable and growing profit stream that continues to come in, regardless of whether we are at the office or closing any more clients.

     So you may be asking yourself, how do I create a residual income stream?  Well, there are many ways.  If you have the capital, you can invest and create investment royalties.  If you are talented enough, you could write the book, movie or song.  Or you could come up with a unique idea and formulate a way to market the idea so that others are compelled to pay you over and over for it (this one reason why the Internet has grown at such a rate).  Or you could find a way to leverage the time, money and efforts of others in such a way to be able to create a solid income stream that, once built, continues on well after you stop working.  And how do you do that…?  We’ll that will be the topic of an article soon to follow.

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