Comparing Passive Income and Residual Income

There is just something magical about the concept of passive income. Just imagining that I can lounge around and leisurely make money while actually doing nothing at all sounds like it shuld be a crime. Still, myriads of people are currently doing. Truth be told, many of them have been doing it for years.

First of all, we probably need an understanding of what passive income is. The truth of the matter, however, is that everyone has his or her own definition of the term. On my part, I tend to think of passive income as income that does not require the earner to have an active role in revenue generation. That’s not to say you have no role (although you may not); it’s just that active participation can be limited.

By way of example, think of a pilot who’s going to fly from the East Coast to the West Coast. Everything up until the plane takes off requires his active participation: taxiing down the runway, taking, off, etc. Once he’s airborne, however, he puts the plane on autopilot. In this instance, “autopilot” is the equivalent of “passive”; the pilot only has an active role at takeoff and landing. Similarly, with passive income, the income earner only has to have limited involvement – if any – with the income-earning activity.

Moreover, although I use the terms interchangeably, this can be seen as slightly different that residual income. With residual income, typically the work is done upfront and there is no need for any further effort in order to continue generating income. A great example of this is writing a book. After the author finishes it, he doesn’t need to do anything else; as long as the book sells, he’ll continue generating income without putting any more effort into it. Thus, residual income can be viewed as a type of passive income. Another great example might be stock dividends (which is what I was actually referring to in the first paragraph when I mention how people have been earning passive income for decades).

In retrospect, passive income may actually require a little hands-on attention at times. The income earner probably won’t be able to completely check out and live off the earnings (unless this is really residual income in a form like that previously noted). Nevertheless, it clearly beats being a working stiff, which most of us are (but hopefully won’t remain).

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