Passive income is any income that you make without actively doing any work, hence the term “passive”. In most case, the money comes from various investments that you already made. You don’t need to be directly involved with the money that you’re making. A good example is offering rental services like a house, car or equipment. Your initial investment is made when you purchase the item which you’re now renting out. At the end of the day, you collect money from the person who’s renting the item. Stocks are also another good example of passive income. If you buy stock and its value increases, you get passive income from it. Pay per click advertising and SEO are also examples of passive income.
Residual income is any extra income that you make off a particular item/service even after you’ve initially sold it. You create the item just once and can collect plenty of revenue from it even years after its initial sale. The payments are agreed upon in advance. An example is the royalties which you receive from publishing a book, song, or film. You create a song once, register it with a copyright society and publishing company, then you can receive royalties every time it’s performed, shown in a film, or broadcast on radio. Another example is selling services online. You can sell a service which people subscribe to. Every time that subscription is renewed you make residual income; money made beyond the initial sale. Other examples include affiliate programs and network marketing.
It’s important to have one of these types if income because you’re assured of getting some money no matter what. You don’t have to do any extra work beyond the initial investment/sale in order to generate this type of income. So it gives you an extra source of money which you can invest in other ventures if you wish. Just make sure that if you plan on making residual or passive income, the initial steps should be rock solid. You don’t want to have to maintain the service rigorously; it stops being residual/passive if that’s the case. If you implement it successfully you may never even have to work a day again in your life. There are many musicians, authors, filmmakers, and even ordinary people that make huge amounts of money passively.