Today, generating an income can be challenging and tricky. People look for extra income, although employed and earning a monthly salary. Still, these people look forward to their bright future, especially during retirement. Aside from starting a business, the safest and most recommended way of generating an extra income, aside from the monthly salary, is the passive or residual income.
What does this income mean?
It is money that continually flows after the primary investment of time and resources is completed. There are various examples of these, namely:
- Artist royalties
- Rental income
- Interest income
- Dividend payments
It is a type of income that is not earned by hourly wages. It needs a primary investment of money or time or can be both with the initial objective of earning ongoing income.
How does it work?
It is a measurement of the tangential profits gained after subtracting all costs of the capital on generating that income. It is a type of source of income, which includes:
- economic value-added
- economic profit
- abnormal earnings
A residual or passive income comes in different types, such as:
- Stock valuation. It is a valuation method estimating the company’s common stock on the intrinsic value. It accounts to finance the operations of the company by the following:
- cost of capital
- combination of equity
- debt expended
The passive income valuation model values a company as the present value and sum of book value, and expected future passive income. In this case, the profit remaining after the opportunity costs deduction for all capital sources.
- Corporate finance. For managerial accounting, a passive income for a company is an amount of leftover that operates profit after paying all costs of capital to generate the revenues. Also, it is the company’s net operating income or the profit amount exceeding the required rate of return. In this case, the passive income is used to assess the capital investment’s performance.
- Personal finance. Passive income is synonymous with a monthly disposable income. The total income stays after paying all monthly debts. Passive income is the key factor when a lender considers a loan application. An enough passive income amount indicates the borrower covers the monthly loan payment.
For an individual, a residual income means free cash available to spend after meeting all the obligations. Anyone can work with this kind of income by investing in a passive income investment. It is the most ideal investing option recently.