Residual income has several meanings, but in personal finance it’s what’s left after you’ve paid all your bills and other expenses. The remaining cash can go to anything, including saving for an emergency, investing for retirement, making a big purchase, or spending it on something important to you.
After paying bills and other debt obligations, many people may find that they don’t have extra cash. If you want to build a residual income, there are a few ways to do it so you have some money tucked away when you need it.
What is residual income?
Residual income is the money left over after you pay your bills (house payments, utilities, loans, credit cards, etc.).
There are a few different ways to build residual income. You can put money away from your regular paycheck or use other types of income streams to earn more money.
Why it’s important to maximize your residual income
You want to have enough money to save some for emergencies and other unexpected expenses as well as retirement.
But the cost of living and inflation have skyrocketed in recent years, while the federal minimum wage has remained at $7.25 an hour since 2009. As a result, many Americans are still living paycheck to paycheck.
More than half of Americans are one crisis away from homelessness, and up to 60 percent of people who are homeless have jobs, according to the US Interagency Council on Homelessness (USICH).
Many Americans are looking for ways to increase earnings, stop living paycheck to paycheck, and create a financial cushion. The more you can build your wealth for the future, the more financially secure you and your family will be in the long run.
The best ways to build residual income
There are a few ways you can build a residual income. Try a few different methods to see which works best for you.
1. Reduce expenses
One of the fastest ways to build residual income is to cut expenses. This can be a few different things, such as:
- Negotiate lower payments. For things like your phone, internet and cable bills, see if there’s a way you can talk to your providers about lowering the payments. Compare competitors’ prices with promotional offers and agreements with your current provider. Tell your current providers about these offers and see if they will match them. If not, you can move to a new provider at a lower rate.
- Pay off credit card debt. This may seem counterintuitive, especially for people with minimal extra cash. But the more you can save on credit card debt, especially the balances with the highest interest rates, the faster you’ll be able to free up monthly cash. You can try debt avalanche or debt snowball methods or pay what you can until the cards are paid in full.
- Terminate unnecessary subscriptions. This could be anything from your expensive gym membership to a meal delivery service. Check your streaming services to see which ones you use the least and still pay for, then consider ditching them.
2. Increase your income
If you are already working, consider how you can increase your current income. It looks different for everyone, but it can be:
- Working more hours for extra pay.
- Asking for a raise or promotion to increase your salary.
- Earning a bonus.
If these are not feasible, look for a new primary job that pays more or get another job to increase your income.
3. Find a side hustle
Consider trying a side hustle (or a few side hustles) in addition to your full-time job to earn some residual income. You can use your day job to pay for your regular expenses, such as bills, transportation, and food, while your side hustle funds your savings, investments, and retirement.
Everyone’s sidehustle game looks different. Some people may drive for Uber or Lyft, while others sell goods or services online such as:
- Writing, transcription or editing
- Design, photography or videography
- Coding or programming for websites or apps
- Web design and development
- Project management
- Virtual assistant services
- Accounting (taxes, bookkeeping, etc.)
Nearly a third of Americans believe they will always need a side hustle to earn money in addition to their primary source of income.
4. Invest in real estate
If you have some cash set aside, you can use some of it to start investing in real estate. There are a few ways to do this, such as:
- Buy a property to live in and rent out one or more of the rooms.
- Buying a home and renting it out for long-term use (for example, a family) or as a short-term rental (directly through a real estate agent or through a site like VRBO or Airbnb).
- Buying real estate and then flipping (selling) it.
- Buying a multi-unit property (such as an apartment building or triplex) and renting it to tenants.
Real estate investing is not for everyone. It is risky and a profit is not guaranteed. In fact, you may lose money on the investment. For some people, the risk of losing more than their original investment is too much to bear. For others, the steep learning curve can be a turn-off. Make sure you understand all the risks involved before investing in real estate.
5. Make money through dividends
If you are already investing in the stock market, look for stocks that pay dividends. Dividends occur when a listed company shares a portion of its profits with shareholders. You become a shareholder when you buy into a share, regardless of whether it is one share or 100.
Dividends are usually paid quarterly, although some are paid monthly or annually, depending on the company’s setup. The amount of the dividend is also at the company’s discretion.
You can also make money through dividend funds, which are mutual funds and ETFs that include dividend-paying stocks.
6. Resell your stuff
Look around your home and see what you no longer use. Some of these things may be worth more than you realize. Decluttering not only frees up space in your home, it can add some residual income to your bank account.
Try selling your stuff locally via Facebook Marketplace or OfferUp. You can also host a yard sale or garage sale. If you don’t mind shipping, you might want to sell high-ticket items — like electronics or rare collectibles — online. Look at other sites like eBay, Poshmark, or Craigslist to sell your stuff.
7. Save credit card rewards
Many credit cards offer cashback rewards every time you use your card. Some have decent sign-on bonuses, while others let you choose your highest spending category to earn rewards on what you spend the most money on.
Check your current credit card rewards or look for a new credit card to see what rewards they offer. Remember that applying for a new credit card triggers a hard credit check with a small drop in your credit score, although it usually returns after a few months of timely credit card use. Avoid signing up for new cards if you plan to make a big purchase — like buying a home or car — in the next few months. These lenders will likely check your credit score, and you don’t want it to go down when they run that check.
Bottom line
Residual income is a great way to earn extra money and build financial security. Earning residual income, or more than what you need to pay your bills and expenses, gives you the financial freedom you wouldn’t otherwise have if you were living paycheck to paycheck. There are many ways to build residual income, and some ways may work better than others. Try some of them to see which ones suit you.