Lecture 4-Residual Income Flashcards
What is an active income?
Active income requires one to work continuously to earn money. 95 per
cent of the people around the world are dependent on active income. This
requires trading time for the money and for that reason it is difficult to become financially independent
-You receive a pay check based on how much work you do. You need to put
in certain number of hours every week, and in effect, it means that you
are exchanging time for money.
- the ability to earn money
from linear income is limited.
What is residual income?
- seen as a key to wealth and financial independence because it does not depend on one’s continuous efforts.
- Residual income is regarded as a more powerful and profitable source of income because it keeps coming in on a regular basis from work you do once
-Residual income requires time, effort and determination especially
in the beginning. However, later on, it will keep on producing income on a regular basis.
-It can help creation of a regular and multiple streams of income
Examples of residual income
Writers, for example, receive royalties from their
books. For example, Harry Potter.
• Musicians receive royalties from their music.
They record a song for once and every time that
song is played they receive money. Income is paid
to them (or their family) even after their death.
• Actors and actresses receive residual income
from their movies. After making a movie, their
initial efforts will be rewarded indefinitely
What are the main sources of residual income?
- Dividends
- Property
- Business
- Investments
- Internet
How can property be used as a source of residual income?
- Property as an investment has always attracted a lot of interest from investors because it is a tangible asset, providing investors with a potential source of income and capital growth.
-Average price of property in the UK rose 520
per cent between 1986 and 2014.
-Buy-to-let market has especially experienced a
massive growth in the UK.
-Rent out rooms
The problems with property as a source of residual income
To create residual income from property requires capital investment.
- Money is needed for a deposit for a mortgage, costs of property purchase and refurbishment.
- In past, many people bought buy-to-let properties while using equity in their home. They first buy a house to live in and once this increases in value, they borrow more money from the bank to enable them to pay deposit for a new buy-to-let property.
• However, banks have increased deposit requirements for
mortgages and it has become increasingly difficult for young people to buy a house now for creation of residual income.
Business as a source of residual income
-Residual income can be generated from setting up successful businesses and these have created many wealthy people.
-Internet offers the opportunity to run a business with minimum
costs.
• It is possible to have a business on eBay, simply by buying items at
cheaper rates and then selling them at a higher price.
-E.g Bill Gates
Investments as a source of residual income
-Capital growth – if the price of shares rises above purchase price.
– Income in the form of dividends.
• Investing in the shares of a single company can be risky, so people investment in a portfolio to spread the risk of loss.
• In order to receive a sizeable amount of dividend income, it
is necessary to have a substantial amount of capital invested.
• Regular, monthly investment over a period of time will enable the accumulation of a capital lump sum
Internet as a source of residual income through affiliate marketing
-Internet offers mobility, allows to travel./live anywhere across the
globe and frees individuals from 9 to 5 jobs.
- An affiliate or a third
party acts as a part of virtual sales team by placing adds or links on their website, which will direct visitors to the home page of an
established retailer. Every time that visitor goes on to make a purchase, or another specified transaction, that third party receives
a commission.
• The attraction of affiliated marketing is that it can be fitted around
other commitments, such as work, studies and does not require a high capital outlay
Internet as a source of residual income using e-books
-Popular ones include selling e-books, writing a blog
and setting up a YouTube channel.
• Many people sell e-books on amazon and this can
create a source of residual income without much more
work.
• Although blogging involves regular work, it also
generates residual income from affiliate marketing
fees. Bloggers need to focus on creating content on their site and generate traffic.
Importance of assets in creating a residual income
Assets can be tangible (property, gold,
ornaments) or intangible (shares, bonds).
• Net worth: Value of all assets-all liabilities.
• More the assets you have, the higher is your
net worth.
How to acquire assets for residual income, 5 concepts?
- Invest in things that go up in value
- Dont diversify
- Wealth seekers take more risks
- Choose investments that are powerful and stable
- Control is essential
Invest in things that go up in value as a way of creating residual income
-Certain assets appreciate in value while
other depreciate. Assets such as cars, phones, clothes, shoes etc. will
depreciate in value after purchase.
-Other assets such as property, shares
and collectables have a high likelihood to appreciating in value.
-Wealth accumulation depends on investing in such assets that appreciate in value.
Dont diversify as a way of creating residual income
- Don’t diversify in the beginning of your investment career.
- Focus on one stable/strong investment and watch it carefully.
Wealth seekers takes risks as a way of creating residual income
-safe investments do not yield high return.
Such investments do not produce wealth. Choose a mix of stable and risk investments.
