From The Desk Of:

Justus Meyer,
Port Elizabeth, South Africa

Residual Income

"How to earn money, while you sleep."

What is residual income?

There are two ways to earn money - either you exchange your time for money, which is sometimes referred to as a "linear income," or you can earn a residual income...

Basically "residual income" is money that you earn, month-after-month for work you have completed already. Whether you decide to go on holiday or whether you have to take some time off due to illness, your cash-flow remains unchanged... Except for the odd bit of maintenance, of course.

In the corporate world, it sometimes seems to be a fairly alien concept to people used to earning a salary. When earning a salary, you are literally exchanging your time for money - whether you are being paid by the hour, or not... If you stop putting in the time, you stop your cash-flow. This is obviously not the ideal situation to find yourself in. Life has the habit of being fairly unpredictable and there is simply no way of knowing when you will need to take some time out to deal with it.

In any case, who would want to be stuck in a job until they retire? A residual income opens up your options and gives you control - which ultimately translates to your own financial freedom.

A great analogy for understanding residual income is to imagine the following scenario:

You are standing in the middle of a field. To your far left, there is a tap, which represents your source of income; and to your far right, there is a hole, which represents your wallet... You have been given the task to fill the hole with water and have two options open to you...

Firstly, you can fill the bucket with water at the tap and carry it all the way to the hole. To make this more efficient, you can work a bit harder and start carrying two buckets. That way, when the powers-that-be sees the effort you are putting in, you might be able to impress them. They might even give you bigger buckets with softer handles and possibly, if you are lucky, a golden trim on the edge of the buckets.

The problem is that most of the water you pour into the hole evaporates while you are on your way to fetch the next load, due to the sun and other circumstances beyond your control. Even though your buckets are slightly easier to carry, the fact remains: the hole will be empty, unless you keep those buckets coming - and carrying buckets is a tiring job.

What if you changed your strategy just a bit? What if you dug a trench, from the tap to the hole, instead? It is still going to involve hard work - let's face it, digging is not fun, nor is it easy. However, eventually the trench will be finished... You will be able to sit next to your water-hole, having drinks whenever you feel like it and just doing the odd bit of maintenance now-and-then. You might even have to turn the tap off for a while, just to make sure that you water-hole does not overflow.

Both strategies involve getting water to the hole - the one builds something that lasts, while the other is a temporary solution, that needs to be repeated indefinitely. There are a couple of ways to create residual income:

  • Invest in property and rent it out,
  • write a hit novel or song and earn royalties from the resulting sales,
  • get some capital together, put it into an investment-account and earn from the interest;
  • buy a business that is already stable, self-sustained and has residual income built into its business-model
  • or start your own, like a Network Marketing business.

"Passive income" vs. "residual income"

"Passive income" refers to exactly the same thing as "residual income." The difference just comes into the focus of the term. "Passive" suggests that absolutely no effort is involved and even though this could be true to a certain degree for some of the methods listed above, no income is ever truly passive.

I prefer "Residual," as it properly conveys the idea that the income "resides" with you after the initial work. And anyway, according to the general statement of the Second Law of Thermo-Dynamics, nothing can ever really be "passive"... but, forget I said that.  ;)

Building residual income through property investments

Investing in property has its advantages and disadvantages. On the one hand, if you have the money to get going, renting out a piece of property is a low-maintenance affair. On the other hand, if you do not, trying to pay off a bond and possibly managing another one, might not be worth the stress and could end up making you a loss instead.

At the end of the day, the residual income formula for property goes something like this: if you have the money, invest and rent it out. If not, then do not - try and buy a small property to live in first; it is much better than paying someone else's bond. If you get a good deal for renting and you have another strategy (initially!) for generating residual income, take it; however, if it is not extraordinarily good, buy instead - you will not be sorry.

Building residual income through Network Marketing

Residual income is one of the core features of Network Marketing. However, Network Marketing companies are not all made equal; and in order to facilitate residual income, a Network Marketing company has to adhere to the following:

  • Their products have to be consumable, in other words products that consumers will buy monthly;
  • consumers have to be able to integrate those products into their lives so that it becomes a necessary, monthly expense
  • and the pay-plan has to provide a fair opportunity for leverage.

Creating residual income through Network Marketing has the trade-off that what you do not have saved in capital, you can make up for in sweat and effort. That said, it also provides opportunity for income that grows exponentially - something that investing in property does not offer.

It is always a good idea to start out with a Network Marketing business and then to diversify into property investments, when you can. Even if you do have the capital to buy property, the exponential growth potential of Network Marketing is nothing to laugh at.

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