Residual Income Formula: Understanding and Using It

residual income formulaWhen people think of income, they usually think of doing a job and then getting paid for that job. This is called active income. Active income is the money you receive after immediately after you’ve done the work, and it is usually based on the hours that you’ve worked. There is a limitation to active income though since you can only make so much in a day.

Residual or passive income is the income that a person would receive after the work has been done. Royalties are a common type of residual income. When a person creates a movie, song, or book, they receive an initial payment, but every time that created piece of material sells, they receive a royalty for it. Creating a stream of passive income can be done in multiple ways. The best way to do it is to create something that people will constantly want to purchase. If you want to create a residual income for yourself, check out the Udemy course The Passive Income Stream Marketing Funnel.

The Residual Income Formula

Calculating your residual income is pretty simple, and the formula can be done rather easily. Your residual income or RI can be found with this basic formula.

RI = A – (B x C)

In this formula each variable has a specific meaning. The variable A is your net operating income. The B variable represents your minimum required return on your assets, and the C variable represents the average operating assets.

These terms may seem a bit complicated, but they’re rather easy to pick up, and they aren’t just for large companies, but for small self-employed people as well. After all, there are several passive income ideas you can use to make easy money.

Understanding the RI Formula 

Now that you know the residual income formula, you can understand how it works. Your net operating income is how much money the company has made or revenue once all of the expenses are counted. Say you wrote a book and it sold 1,000 copies. Before you can say what your net operating income is, you would have to subtract all of the costs for creating your book, such as designing the cover, publishing, and getting someone to edit it.

Subtracted from this operating income is the percentage cost of your capital times your average operating assets. The percentage cost capital is the percentage cost needed to get certain investment funds. An example of this would be a company that raised its funds by giving out bonds. The company would then use interest rates that were associated with those bonds to establish a percent cost of the capital.

The final piece of the equation is the average operating assets, which involve counting how much on average it would take to continue operating assets in the business further down the line. This is the money that will go back into the business in order to further its production.

When a company is successful, residual income is a great value. There are many companies that work towards creating a business that has a large emphasis on residual income instead of passive income.

If you are interesting in creating a business that uses this model, try the Udemy course How to Build a Passive Income Business.

Examples of Businesses that Make a Residual Income

There are several businesses out there today that have a focus on residual income. Owning a home and renting it out is a form of residual income. Although the home is yours, you aren’t necessarily working billable incomes to make a profit on it, but instead allowing someone to live in it and having them pay you for that service.

On a similar note, making a passive or residual income through writing is common as well. A person can write a book or an eBook and continue to make money from it long after it has been written

Many writers can support themselves on a single book if it becomes successful enough. There’s an Udemy course you should try: How to Make Passive Online Income Writing Books & eBooks that teaches you some of the fundamental aspects of making money online as a writer.

Using Multiple Streams of Income 

Following the residual income formula, you can create an additional stream of income. As long as the outcome of the formula is positive, then your business is making an additional income, despite its costs. There are several streams of income a business can make in order to be successful. Try the Udemy course How to Create Multiple Streams of Income in order to learn more about making money in different ways.