Ever wonder how wealthy people seem to be able to earn money even if they’re not working? Their secret is residual income.
Take, for example, businessman John Gray who in 1903 invested $10,500 of his savings into a fledgling car company called Ford Motors. By 1905 the company’s profits had tripled and Gray received two dividend payments each worth 100% of his initial investment. Although he passed away in 1906, Gray’s family continued to earn dividends on his investment until they sold the shares back to Henry Ford in 1919. Over that 13 year period, Gray and his family received $10,355,075 in dividend payments, i.e. residual income.
These payments were on top of the $26,250,000 of profit they earned from actually selling the shares. If, rather than selling, the family had continued to own the shares to this day, they would have received over $1 billion in payments (when adjusted for inflation).
This savvy use of $10,500 in savings created a source of residual income that meant both Gray and his family could have arguably lived comfortably without ever having to work another day in their lives.
What is Residual Income?
There are two primary ways to earn money: work income and residual income. Most people survive off of work income, also referred to as linear income. This is the income you earn in direct correlation to the number of hours that you work. Whether you get paid an hourly wage or have a set salary, you are earning work income.
Residual income, also known as passive income or recurring income, is income that you earn without having to put in any recurring work. John Gray’s investment in Ford Motors is an example of this.
In essence, residual income is putting your existing savings to work to earn you more money even when you’re not working.
Why Would You Want Residual Income?
Besides getting to sit on the couch all day watching Netflix, there are other benefits to earning residual income.
- Combat Inflation: Inflation is essentially the devaluation of money. This means that the same amount of money today will be worth less in the future. It is because the value of currency is constantly changing. While the day-to-day changes may not be significant, over time, they can add up. For example, what you could buy for $100 in 1997 would cost you $151.78 today. That’s why parking cash in your bank account instead of investing it will most likely decrease its value over time. So, while holding your money as cash may seem the safest bet, it may actually hinder your total earnings in the long term.
- Create Financial Independence: Earning multiple streams of income makes you less reliant upon any one stream, increasing your overall financial independence. The adage of not putting all of your eggs into one basket applies to all of your finances, including your income streams. While your residual income streams may not initially match the wages earned from your work income, over time they can built up to the point that they eventually replace the need to work. Residual income can be a helpful way to save for big purchases, change jobs or even start your own business.
How Do You Earn Residual Income?
Technically speaking, the number of ways to earn residual income are unlimited—but some are more practical than others. Here are a couple of options that most people could take advantage of:
- Renting out your home. You can earn money by renting an asset that you already own, such as a spare room in your home with websites like AirBnB.
- Investing in high dividend assets. Certain investments like hard assets tend to produce significant cash-flow, things like commercial real estate, timber land, or energy stocks. This cash-flow is paid out to investors in the form of dividends which results in a steady residual income stream.
In recent years, technology advancements and financial reforms have made it easier than ever to create residual income streams by investing online. Stock market robo-advisors like Betterment, peer-to-peer lending options like Upstart, and online real estate investment platforms like Fundrise have made the ability to earn residual income available to virtually anyone with a computer and $1,000 in savings - giving you the opportunity to be the next John Gray¹.