Sunil is the author of The Extra Money Blog, a blog dedicated to helping hard working and successful individuals get more out of life, whether it is financial freedom, flexibility in lifestyle design or more freedom to live life on your own terms.
Passive income and residual income are two phrases that are often used interchangeably, but do they really mean the same thing?
What is the difference?
If you ask Meriam Webster, the answer is no. In short, the dictionary says that passive income is income from activities you don’t actively participate in. Residual income on the other hand means recurring income. So how are they the same? Why are they used interchangeably?
Let’s look at one simple example:
- Crystal blogs daily on BFS. One of the many ways Crystal earns money through blogging is through advertising revenue. Does she have to work any more or less for her to make the money? No. She makes the money even while she is eating, showering and sleeping. Sounds like passive income doesn’t it? It is.
- Crystal gets paid by the advertising vendor at the end of the month, and next month and the month after that, so long as the vendor keeps advertising on Crystal’s blog. Sounds like a recurring pattern doesn’t it?
This example is precisely why the phrases passive income and residual income are used interchangeably by many. Though technically defined in different terms, the two are often interdependent on each other. If an income stream is passive, it likely is also residual.
How is this different from a traditional job or a career?
Let’s have a look:
- Crystal’s neighbor goes to work every morning and works 8 hours. She comes back home with $64 everyday because she makes $8 an hour (8 X $8 = 64). One day she falls sick and cannot go to work. She makes zero dollars for that day.
- Crystal on the other hand usually blogs from her home office. Today she decided to spend the day with the hubby and together watched a romantic movie late night. They had a late night
and because of that Crystal slept in till noon! By the time she was done getting ready for the day, the day was over and no work was done. At the end of the month, her check from advertising revenue came in along with checks from her affiliate commissions and other online gigs.
Aha – now I know. Both these phrases mean getting more “bang” for my sweat. It is one way to get a higher return on time invested working. When you work a job, you make $X per hour worked. When you work to build a passive and residual stream of income, you work Y hours to make $XXX on an ongoing basis.
Establishing a Passive Income Stream
While all that sounds hunky dory, don’t be mistaken and think establishing passive and residual streams of income is an easy task. In fact, because the gratification doesn’t come until months and for some even years down the road, it can be a brutal business to get into. But when it rains cash, it pours and it doesn’t stop coming in long after you stop working for it.
I have successfully established several passive and residual streams of income in all but the last type of ventures above. Each one took careful planning, preparation, a lot of time and energy to execute and develop overtime. The rewards have been tremendous to say the least.
I have been building passive and residual income streams for years, moving from one venture to another after having put it on auto pilot. This has rewarded me with the life I always wanted to live. Blogging about my success, how I did it and sharing what I know is one way I give back to a world that has given me much more than I could ever have asked for.
Crystal’s Comments: I work a regular job and run my three blogs. The income from the blogs means way more to me even though it’s a tenth of what I make at work (so far), lol. Passive income streams are amazingly more fun, lol!
What passive income streams do you enjoy? Are you thinking about starting anything specific?
I took my first steps toward a residual income by starting my own website a few months ago. While I am still in the building process, I believe that I’m very close to yielding the benefits on this venture.
I agree with Crystal. I often am more excited about earning a dollar with my website than the $150 I made at work. It’s just more fun to build up a residual income! I love it!
I personally don’t believe in a true passive or residual income. Some royalties for music etc, I guess would count but people still need to play it on the radio and promote it for you to get your royalties.
If Crystal stopped posting to BFS, then the income would soon dry up because advertisers would eventually start walking away one by one.
I love dividend bearing stocks. I don’t even have to write blog posts for those… just invest money.
We don’t have ads on our blog yet…
@First Gen, you’re right, a passive income from blogging can soon dry up if you stop. But still, the amount of money you can get from it in unlimited. If you simply “do your thing”, the amount of money will get higher and higher and the amount of hours you put can get much lower than a regular job.
My response in general is I enjoy and believe in passive income. There are ways to get even more. I don’t blog for money, but I realized it could be a good way to join fun and income. Affiliate programs are one, niche sites are another. Don’t get stuck in the box! I got inspired by Smart Passive Income and Adam Baker (Man Vs Debt) lately. I am whiling to give it a try!
@ Life and My Finances – Do you think a big component of that is that your passive income venture is in a field that you truly enjoy and are passionate about? I doubt that your website is about a topic you don’t care for?
@ First Gen American – What do you consider interest income generated on cash sitting in a bank account? Is that passive income?
@ Nicole – Dividend paying stocks are one of my favorite passive income streams, and have done very well over the years investing in them. The issue for many is the lack of discretionary cash to invest in them to begin with. That is what makes websites, blogs and other such avenues more attractive, at least in terms of creating something from nothing or very little. Once earnings pile up, there is no limit to how one uses cash. Agree? Disgaree?
@ DO Not Wait – I could not have said it any better. You my friend nailed it right on the head. From personal experience, I now have 12 niche content sites and counting. I have not touched the oldest one in almost three years. Results? The income from month one to now is still on an upward trend. Traffic has grown and it has impacted revenues (direct correlation). This is another area I am very much passionate about and often talk about on my blog.
I can also attest to the inverse relationship of time / effort and results. As time passes, your effort decreases and results increase, providing you have done what’s required beforehand.
I love your comment “Don’t get stuck in a box!” – absolutely love it
@LifeAndMyFinances, making money doing something fun just feels better!
@First Gen American, good points. Blogging doesn’t feel very passive either, lol.
@Nicole, my husband was positively giddy a couple of days ago since a bunch of our dividend stocks paid out and some of the dividends were increased. I have to agree that they kick butt as sources for passive income, lol.
@DoNotWait, I do hope that I get to cut back my hours with time…35-40 hours a week for blogging and blog-related activities seems a bit much sometimes…
@Sunil, thank you! Glad you agree. I am so motivated lately, it is amazing! I am not sure what I will get from all of it, but I prefer trying than letting things go I wonder why I got stuck in the exact same point. As I said, my blogging will always remain the fun part of my professional life, but I am sure I will make a living out of it one day or another, and a good one also!
I have bookmarked your site and will check it out often as niche sites really interest me. I might also email you if I have questions! 
35-40 hours a week is a lot, knowing you have a regular job on top of that. I am sure this amount of hours will go down, or the income will surely grow up! Don’t give it up. And, from what I know about you, I am sure a lot of those hours are the ones you enjoyed the most of your day! That is already what so many people are aiming for!
@Crystal, Maybe a day will come when you’ll have a VA!
I agree with Sandy. If Crystal continues to just sleep in and watch romantic movies day in and day out, then her income will eventually go away as advertisers will drop her like a hot potato. I am not sure how blogging can be considered passive income as, by definition, passive income is from activities you don’t participate in. Well, nothing is more participatory than blogging, even if it is not every second of the day.
@ Everyday Tips – Good point and a valid one. We must discuss the nature of how search engines work (spider crawling, indexing and frequency) to add more context to this point. Initially, although it may be necessary to blog daily or at least 2-3 times per week, the perceived requirement significantly decreases over time as the blog is established in search engines. The downside is that your readers are getting less info to consume, but the impact on search engine rankings (providing SEO is done appropriately) is minimal.
I can tell you from experience that a well optimized website that has been well established (through internet marketing efforts that build inbound links/back linking) experiences an increase in traffic and revenues over time (providing it is monetized appropriately). How long this continues for I cannot say as none of my niche websites have experienced declined. There are some that have stagnated/plateau(d), but none have take a hit. And when they do, I am confident that internet marketing efforts will revive the results for another few months. One highly underestimated component of success online is domain age and longevity. Consistent performance (traffic/visitors) over long periods of time is not overlooked by search engines, and such websites are rewarded very well.
DNW – I welcome any questions on niche content websites. The blueprint is very simple and methodical in nature. It is also very logical if you stop to think about it (many don’t, and I am not saying they should). It is execution (no surprise) where folks fall short.
Sunil, I need to learn more from you and generate more residual and passive income.
I get a bit of dividend and interest, but not a large amount. I’m going to focus on building a yield portfolio in the next few years.
I get some money from a rental, but not positive cash flow yet. Rental is the way to go from what I understand.
I’m definitely trying! I’m going to be starting up some niche sites and blogs in the beginning of the year. Been doing some preparation for it, including reading up on some SEO tactics and signing up for courses from some Internet marketers. Hoping to make a good chunk of income from it
@ Retire B4 – Yes rental is the way to go in my opinion. I have written extensively about speculative investing (gambling essentially) and value investing (finding undervalued rental properties). As far as dividends, the larger the p-folio grows, the larger the dividend amount. I take income generated by my rental properties and websites and invest them by buying more properties, websites, investing in the market and other ventures. They key is to have the streams of income flowing in order to use the money to make more money. Every venture has to have a starting point (i.e. an income stream) for it to manifest into something larger.
@ Briana – There is no better way in my opinion and experience than what you are about to pursue. We are blessed to be living in a time where this is all possible. You might want to read the free report I have on my blog, which specifically addresses online ventures similar to what you are wanting to pursue in a step by step manner.
Sunil-well written (as usual) and informative. Your ebook is amazing
Crystal, it’s wierd how the small amoung of money from blogging is so very rewarding? Who would have thought working/blogging for less than minimum wage would be so rewarding?
Barb – as always, very kind of you. a second one is one its way in 2011!
Sunil – good example on the bank interest. It is indeed passive income, but most people who have money in the bank watch and worry about it. They are checking CD rates and swapping money from place to place to make sure their earnings are at least keeping up with inflation. If I buy a CD now at 1% interest and then suddenly inflation hits and rates rise to 5%, the individual would be theoretically losing money by treating it as a passive investment.
My mom was a little jealous of my aunt having money in the bank and not having to work. She always used to say “she ran around moving money from bank to bank as her job.” It was true, for her it wasn’t passive and she was working hard to maximize her return during the 70′s and 80′s when inflation and interest was going out of control.
FGA – I too know people who do that. I would never do it. It boils down to understanding what your spare time is worth to you I suppose. That said, have you looked into Ally’s programs, where they will automatically upgrade your CD to a higher interest rate when rates change? This is the future. Smart banks and those that truly want to help are realizing what people want and are coming up with ways to automate cash flow and cycling.
Blogging cannot be considered passive income – I agree with other users.
In my opinion, the only true passive income is the savings account, as you don’t have to do anything or participate in any way to get the income.
I will have to agree that blogging in and of itself is definitely not passive.
But I know several bloggers who have started blogs, built the blogs, and then stopped updating those blogs but still get $40-$200 a month via Adsense on what I consider to be dead blogs. That seems passive.
Crystal,
you are absolutely correct. and as many of us agree with, over the long term, your input decreases significantly while output (revenues) increase significantly. moreover, if you implement the right systems in place to automate processes (i.e. ebook sales, subscription model for which content has already been created), you can turn the blog into a passive revenue generator and move on to the next endeavor.
interest income, while the truest form of passive income, is not attainable for majority of individuals (at least in significant enough amounts). therefore, blogging and other such endeavors help create additional cash flow / income streams, which expedite accumulating the large nut necessary to generate significant interest income that one desires
Terrific article and Crystal clear examples
. I’m looking more into investing because the banks pay you squat. Blogging has been quite rewarding so far even though there is no cash flow yet. Rental property is cool, but you need money to make money. So if everything works out, blogging and investing brings in some cash flow that I can parlay later to a rental property. Sounds like a plan? 
It’s true, passive income is the most rewarding by far. I earn only around $250 a month from passive income but I care about this so much more than what I earn from my other sources.
Question about the stocks: So far as I know, the dividend is subtracted from the share price every time it’s paid out. So, even though you get cash paid out, your total profit is zero. So how is it that you see dividends as a source of income?
@Adi, I have never heard about the dividends being taken out of the share price…where did you see that?
@ Crystal,
when I still had shares it was normal (at least here in Europe). Every year when you got the dividend, your share price instantly dropped by that amount. They called this the ex-dividend price.
It makes sense in retrospect, because I should think market dynamics would ensure such a drop anyway. Or do you have a rule in the US that you only get a dividend if you hold the shares for a minimum time? But then that time threshold would be when the price drops.
So, I officially declare myself confused.
@Adi, for the dividend-paying stocks we own like Johnson and Johnson, the share value doesn’t seem to drop once we are paid. I don’t know if it’s because we bought and held for more than a year now or not though. I am forwarding this link tomy fellow blogger, JT from Money Mamba, who knows way more about this than I do. Hopefully he’ll chime in.
The relationship between share prices and dividends isn’t 100% perfect. If you were to do a company valuation, then a company would technically be worth less after a dividend payout than before. If company X has a value of $100 before paying a $1 dividend, then it would be worth $99 after the dividend, as $1 is removed from the company’s cash on a per-share basis.
Whether or not this is reflected in the markets is case-by-case. In general, stocks that pay the highest dividends usually see the biggest drops after an ex-dividend date. If a company pays a $5 dividend on a $25 stock, then tons of investors are going to pile in before the dividend date and leave after. Thus, the buying and selling creates more volatility, and you’re more likely to see the dividend loss to cash priced in after.
In companies where the yield isn’t as high, the ups and downs with dividends are hardly noticed. Few people pile into a company to grab a .5% dividend payout, as the stock could easily move .5% between the purchase date and the dividend date.
The answer to the question can’t be a “yes” or “no” all the time. The price of stocks are based on supply and demand, and people who buy and sell them do them for different reasons. If a large part of the demand for stock is coming from people who want the one-time dividend, then you’re likely to see the price drop after the dividend comes. If, on the other hand, most of the demand for shares comes from long-term investors, the relationship is not at all 100% correlated.
In short, the big-time dividend stocks that everyone loves (Dividend Aristocrats) don’t see this kind of ex-divided pricing activity. However, the smaller companies that pay big dividend yields will, as will those which pay out HUGE one-time dividends.
Historically, dividend paying companies have been the best investments, and I can’t see that trend changing any time soon. The reality is that one dollar paid out in the form of dividends is $1 that can buy you a larger portion of the company. Meanwhile, $1 in cash on the books of your favorite company is just like having $1 in a savings account. Over the long-term, $1 in a company is going to provide much better returns than that $1 in a savings account.
That’s the short of it, but we can get way more finance-y if you’d like.
I hope that makes sense.
Important note I forgot to add: In the US, dividends are most often paid quarterly, so you would have to risk your money 4 times per year to get in and out for one year’s worth of ex-dividend dates.
In Europe, you need to risk it only once. I suppose this is why you see a lot more ex-dividend volatility in Europe than in the US.
Ok thanks. No it finally makes sense.
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