Although the two terms are often used somewhat synonymously, there are significant differences between the two. While there are similarities between the two, there are also several points of difference. We investigate what they each mean:
What is the difference between Passive Income and Residual income?
Passive income is defined as inactive or submissive income; income that does not involve direct involvement from you. For example, it’s not necessary to be directly involved when it comes to investments.
Examples of passive income include renting out space or investing in stocks. You make money when you receive a rent cheque or when the stock price goes up. Affiliate marketing, where you use multiple sub-affiliates can also be considered passive income. The search engine continues to generate traffic and you make money off the sales of affiliate products and services.
SEO, or Search English Optimisation, comes under the category of passive income. Your website is primed for search engines and traffic automatically gets diverted to your site. Once customers enter your website, they click on the affiliate links, thus making you money even when you are not working on your website.
If you sell product development programs like ‘how to’ courses, educational CDs, they also count as passive income because they require minimal customer service interaction. Similarly, PPC or Pay per Click advertising is considered a form of passive income as prospective customers click on adverts without your direct involvement. All you need to do is set up PPC advertising mechanisms on your website.
Residual income, on the other hand, is recurring income that generates itself at regular intervals and in specific amounts. The payments are made to a specific individual according to a pre-agreed sale amount
Examples of residual income include sales; the payments and income continues for a long period after the transaction has been concluded. Similarly, residual income includes affiliate transactions for websites like dating, web hosting or any membership sites where you need to pay a fee every month or every quarter.
The differences between passive and residual income schemes can be explained as follows:
- Residual income streams require more effort and time to set up compared to passive income schemes
- Passive income generation involves more risk and are generally more lucrative compared to residual income;residual income generation is more reliable although it may pay less in the long run
A residual income plan may be recommended for individuals who are looking for low-risk, low-investment income generation.