Residual income and your job

When it comes to balancing your finances, the more money you have left over at the end of every month, the better. In fact, by ensuring that you earn more than you spend, you can build a path to financial freedom—and that’s where your job comes in.

However, achieving financial freedom (or a dream job),  can be easier said than done. In fact, in a recent report, around 63% of Americans are currently living paycheck to paycheck.

One way in which you can help establish financial freedom is through residual income. In this guide, we’ll uncover everything you need to know about what residual income is and how you can increase this important financial number.

What is residual income?

Residual income is the amount of money left over after all expenses have been paid. When you hear the term residual income, it is worth noting that it can be used in relation to both personal and business finances. To better understand residual income in both contexts, let’s take a look at individual and business residual income separately.

Individual residual income

In relation to an individual, residual income refers to the money you have remaining after you have paid all your costs of living. This includes paying for housing, such as a mortgage or rent payment, purchasing food, paying off debt, and all other daily expenses.

To calculate your residual income, you will need to account for all incoming money—such as the salary or wages you earn from your job—and subtract all your expenses from the same time period.

For example, if you earn a monthly net income of $5,000 and you spent a total of $4,700 on expenses each month, your residual income would be $300.

Keep in mind that your residual income may vary from month to month. You can calculate your average monthly residual income by first determining your residual income from the past 12 months and dividing that number by 12.

Understanding your residual income is an important part of budgeting. If, for example, you realize when calculating your average monthly residual income that the number comes out negative, you may gain a deeper understanding of why you are falling behind financially.

Additionally, residual income is an important calculation when applying for lending, credit, or financing. This number will help a financial institution determine whether or not you are capable of making a specific monthly payment.

Business residual income

Similar to individual residual income, a business’ residual income is the amount of profit that exceeds a company’s expenses. In the case of a business, the capital costs of running the organization will be subtracted from the quarterly earnings of the business.

A business’ residual income is an important indicator of the health and performance of a business. This number is often reported to key stakeholders, investors, and business boards.

Residual income vs passive income

In some cases, you may hear residual income and passive income used interchangeably. However, though the differences between the two are subtle, residual and passive income are not the same thing.

Passive income refers to money that is earned with little to no effort or time. Examples of passive income include investing in a property to rent it out or selling courses online.

Passive income can be used to increase residual income, but residual income does not necessarily come from a passive income source. Residual income in relation to passive income is essentially what money is left over when subtracting the amount of money spent on a passive income endeavor from how much is earned.

The benefits of residual income

In the most basic sense, the more residual income you have the more financial freedom you will enjoy. Residual income can be used in numerous beneficial ways, such as the following:

  • To create an emergency fund: Generally speaking, it is recommended that you have three to six months’ worth of living expenses saved away in an emergency fund. The total amount you should have in an emergency fund will depend a lot on your lifestyle. While putting back this amount of money can feel daunting, residual income can help you achieve this goal.
  • To save for a large purchase: If you want to purchase a new car, a boat, or another large item, saving back residual income each month can help you fund that purchase without the use of credit. This can prevent you from paying large interest fees on major purchases.
  • To pay for a vacation: For many, residual income is the perfect way to save up for a trip. Putting aside a small portion of your residual income each month can help you afford a quality vacation without putting a strain on your monthly budget.
  • To fund medical expenses: When emergency medical expenses arise, residual income can help you cover these costs. This can be used both for personal medical emergencies and the medical needs of your family members.
  • To pay for education: Whether you are hoping to pursue your own education or you want to help pay for the education of a family member, residual income can be invested in college or other courses.
  • To save for dependents: For many parents or guardians, putting money away for their dependents is an important part of setting up their children for success. With residual income, you can begin to build savings accounts for young family members.

The options for using residual income are plentiful and the more residual income you have, the more freedom you have to use your excess income for what you value most.

How to increase your residual income

It is easy to understand the benefits of having extra money at the end of every month, but growing your residual income can feel like a monumental task—particularly in light of recent inflation. However, there are numerous methods for increasing your residual income, many of which require only a small amount of effort. Try one or more of the following.

Ask for a raise

By increasing the amount of money you make from your daily work, you can quickly increase your residual income as long as you retain the same living expenses. If you haven’t done so recently, consider asking your boss for a raise. Learn more in our guide: How to ask for a raise at work.

Switch jobs

If a raise isn’t an option, consider applying for a new position either at your existing organization or elsewhere. A career change can help you increase your earnings, leading to higher residual income. Start your job search now, free.

Rent out a room

If you have the space, renting out a room can help you lower your living expenses. This is an example of how passive income can lead to an increase in residual income.

Resell extra items

To add a little extra cash to your residual income each month, consider finding items around your house that you can resell. Through online marketplaces, it is easier than ever before to sell items you no longer use. This can be a double-win if you are currently spending money on storage space for these items. Selling them off will earn money upfront and cut down on monthly costs.

Take on a side hustle

Depending on the job, this could be another example of how a passive income source can contribute to your residual income. Consider a hobby or other gig that you can do to earn extra income, such as commissioning artwork, designing websites, delivering food, or providing translation services.

Lower your expenses

One of the best and fastest ways to increase your residual income is to decrease the amount you spend each month. There are countless ways to make this happen. For starters, build a budget and begin tracking your expenses. This can help you quickly identify areas where you can reduce your spending. From here, think about what extras can be cut, such as multiple streaming services or eating out every evening.

For more career advice that can help you increase your annual income and subsequently increase your residual income, make sure to check out our Career Advice resource center, or start searching for a better job right now.