If you’re looking for new ways to boost your cash flow, you’ve probably already considered starting a side hustle. Which can be a solid option if you have the option to work more without burning out. But if you’re strapped for time, a little more focus on what you already have might be the answer to rake in residual income. And more money for your savings, retirement plan, or that vacay you haven’t started planning.
What is residual income?
Residual income is the money you have in your bank account after you pay your credit card balance, your mortgage, and other bills. Aka disposable income. Think: dividends, money earned from a side gig, or money left over from your 9-5 paycheck.
And if earning residual income isn’t on your list of money goals yet, it might be time to add it. For a few good reasons.
Better approval odds
Besides a good credit score, having residual income is one of the best ways to get approved for a loan. Because it shows lenders that you have enough to cover payments for the money you borrowed.
Residual income can put you on track to build wealth that lasts for generations (aka generational wealth). Because as you cover your day-to-day expenses, it keeps growing. Which means you can use it to invest and build even more. Hi, new property. Or add it to your “f-you” fund. It’s up to you.
So how is residual income different from passive income?
Passive income is money you earn without having to actively work for it. Think: income from a short-term rental and 401(k) investments. So passive income can lead to residual income. But residual income doesn’t always come from a passive source.
Here’s an example: If you own a rental property, your tenant’s rent payment is passive income. But if you depend on that money to cover your house utility bill, it isn’t residual. On the other hand, if you have additional money left over every month after your normal bills are paid…that’s residual income. Even if it’s coming from your paycheck (which means it’s active income).
Got it. Can you tell me how to make residual income?
If you haven’t figured out a way to earn residual income yet, you’re not alone. According to a recent Lending Club report, over half of Americans live paycheck to paycheck. But that doesn’t mean it’s impossible to start growing extra cash. A few ideas:
Start a side hustle
A side hustle is one popular way to make residual income. But, depending on the gig you choose, it could require a lot of time and effort to start earning money. Which is why this route may not be the best option for many people.
Free up more space in your budget
Do you really use all those subscriptions? If not, hitting ‘unsubscribe’ is one easy way to start building residual income. Another way to make more room in your budget? Shop sales and use coupons on essentials like groceries. Pro tip: Use our budget template to get started.
Spoiler: It isn’t just for the wealthy. Investments can help you bring in residual income even if you don’t make six figures. And you’ve got a lot of options to choose from, like ETFs, stocks, or even the metaverse. And if you’re brand new to investing, you can even start with $5 on platforms like Robinhood or Ellevest. Plus, you don’t have to take on investing solo. Enter: crowdfunding. Sites like PeerStreet can help you connect with other newbie investors who might be looking for someone to invest with.
Sell your stuff
Remember that sweater you haven’t worn in forever? Host a yard sale to bring in residual income. Or list items on a site like Poshmark or Etsy to earn a few extra bucks. And don’t skip over the high-ticket items you have lying around the house. Like that laptop you don’t need anymore.
Sounds doable. But is residual income taxable?
Yep. Whether you make your residual income from real estate property, investing in stocks, or an Etsy sale, it’s taxable income. And it’s taxed the same as active income. Which means you’ll pay an amount based on your annual gross income (AGI) and your tax bracket. Remember to tap a tax pro if you need a little guidance.
No matter where you stand financially, you’re at a good starting point for building residual income. Even if side hustling isn’t your jam, shaving down a few of your monthly expenses can put you on track to end each month with extra cash in your bank account. Whether your goal is to take care of future generations or to enjoy the freedom of an “f-you” fund.
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