Residual income has several meanings, but in the personal finance world, it’s what’s left over after you’ve paid all your bills and other expenses. You can use that leftover money for anything, like saving for an emergency, investing for retirement, making a big purchase, or spending on something that’s important to you.
After paying off bills and other debts, many people find they don’t have any extra money left. If you’re looking to build passive income, there are a few ways to help you have some money stashed away for when you need it.
What is residual income?
Residual income is the money left over after paying your bills (house payments, utilities, loans, credit cards, etc.).
There are several ways to build passive income. You can set aside money from your regular salary or use other sources of income to make more money.
Why it is important to maximize your residual income
You want to have enough money to set aside for emergencies and other unexpected expenses, as well as for retirement.
But the cost of living and inflation have skyrocketed in recent years, while the federal minimum wage has remained at $7.25 an hour since 2009. As a result, many Americans still live paycheck to paycheck.
According to the U.S. Interagency Council on Homelessness (USICH), more than half of all Americans are one crisis away from homelessness and up to 60 percent of homeless people have a job.
Many Americans are looking for ways to increase their income, stop living paycheck to paycheck, and build a financial cushion. The more you can build your wealth for the future, the more financially secure you and your family will be in the long run.
The best ways to build residual income
There are several ways to build passive income. Try different methods to find out which ones work best for you.
1. Reduce expenses
One of the fastest ways to build passive income is to reduce expenses. This can be done in a number of ways, including:
- Negotiate lower payments. See if you can negotiate lower rates with your provider on phone, internet and cable bills. Compare competitor prices with special offers and deals from your current provider. Tell your current provider about these offers and see if they are undercutting them. If not, you can switch to a new provider at a lower price.
- Pay off credit card debt. This may seem counterintuitive, especially for people with little extra cash. But the more you can pay down your credit card debt, especially the balances with the highest interest rates, the faster you can free up cash each month. You can try the debt avalanche or debt snowball methods, or pay as much as you can until the cards are fully paid off.
- Cancel unnecessary subscriptions. This could be anything from an expensive gym membership to a meal delivery service. Review your streaming services to see which ones you use the least but still pay for, then consider canceling them.
2. Increase your income
If you are already working, think about how you can increase your current income. This will look different for everyone, but could include:
- More hours for more pay.
- Ask for a raise or promotion to increase your salary.
- Earn a bonus.
If this is not possible, look for a new, better-paying primary job or take on a second job to increase your income.
3. Find a part-time job
Consider trying a side hustle (or multiple side hustles) in addition to your full-time job to earn extra income. Your main job can help pay your regular expenses like bills, transportation, and groceries, while your side hustle funds your savings, investments, and retirement plans.
Every side income looks different. Some people may drive for Uber or Lyft, while others sell goods or services online, such as:
- Writing, transcribing or editing
- Design, photography or videography
- Coding or programming for websites or apps
- Web design and development
- Project management
- Virtual assistance services
- Accounting (taxes, bookkeeping, etc.)
Nearly a third of Americans believe they will always need a second job to earn money in addition to their primary source of income.
4. Invest in real estate
If you have cash set aside, you can use some of it to invest in real estate. There are a few ways to do this, for example:
- Buying a property to live in and renting out one or more rooms.
- Buy a home and rent it out for long-term use (e.g. to a family) or for short-term rentals (directly, through a real estate agent, or through a website like VRBO or Airbnb).
- Buying a property in need of renovation and then reselling it.
- Buy a property with multiple residential units (e.g. an apartment building or a three-family house) and rent it to tenants.
Real estate investing is not for everyone. It is risky and a profit is not guaranteed. In fact, you could lose money investing. For some people, the risk of losing more than their initial investment is too great. For others, the steep learning curve could be a turn-off. Make sure you understand all the risks involved before investing in real estate.
5. Earn money through dividends
If you’re already investing in the stock market, look for stocks that pay dividends. Dividends are paid when a publicly traded company distributes a portion of its profits to shareholders. You become a shareholder when you buy a share, whether it’s one share or 100 shares.
Dividends are usually paid quarterly, but some are paid monthly or annually depending on the company structure. The amount of the dividend is also at the discretion of the company.
You can also make money with dividend funds, which are mutual funds and ETFs that contain dividend-paying stocks.
6. Resell your stuff
Look around your home and see what you no longer use. Some of these things may be worth more than you think. By decluttering, you not only free up space in your home, but you can also bring in some extra income into your bank account.
Try selling your stuff locally through Facebook Marketplace or OfferUp. You can also host a yard sale or garage sale. If you don’t mind shipping, you can sell expensive items – like electronics or rare collectibles – online. Check out other sites like eBay, Poshmark or Craigslist to sell your stuff.
7. Save credit card rewards
Many credit cards offer cashback rewards every time you use the card. Some offer decent welcome bonuses, while others let you choose your highest spending category to earn rewards on what you spend the most money on.
Check the rewards on your current credit card or compare offers on a new credit card. Remember that applying for a new credit card will trigger a rigorous credit check with a slight drop in your credit score, although this usually recovers after a few months of regular credit card use. Don’t apply for new cards if you’re planning a big purchase in the next few months – like buying a home or car. These lenders will likely be checking your credit score and you don’t want it to drop during that check.
Conclusion
Residual income is a great way to earn extra money and build financial security. Residual income, or earning more than what you need to pay your bills and expenses, gives you the financial freedom you might not otherwise have if you were living paycheck to paycheck. There are many ways to build residual income, and some may work better than others. Try a few to see which ones work for you.
