Passive Income Vs Residual Income
So let's have a look at the difference between passive income and residual income.
What is passive income, what is residual income and what is the difference?
Because what we are looking at here is building an online business and developing a certain income type, so we need to understand these terms a little bit before we get into how residual income actually works.
So what is passive income?
It is income independent of your actions, so a good example of passive income is my daughter. She gets pocket money from me every month, she does not do anything for it, same as a trust fund in effect, or dividends being paid every month, that would be passive as it requires no input from you to actually develop that income.
Now creating income online is never passive...
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Let's have a look at what it actually is...
Residual income is like an apple seed, you take 2 apple seeds, you plant them in the ground and you grow 2 trees, at the end of the season you take the apples off of that tree, sell those apples and then use some seeds to plant and grow more trees.
Next year, you have more trees, you have more income and so on and so forth...
What you are essentially doing is making compound interest work for you.
The way compound interest works is that you take £100 and invest it, each month there is a 10 percent growth (as an example), so the second month it is worth £110, then the next month £121 and so on...
So typically what happens when someone creates an online business, is they will put in 40 hours of work a month to earn a $100 in the first month, which does not seem like much of an investment.
But by the time we come to the 6th month, that same investment each month starts to compound and it now pays £600 a month, you are of course investing the same amount of time each month (example 4o hours per month) and the return still isn't great...
Now you get to the 18th month, the business has been compounding, you are still investing 40 hours a month but now it is worth $2000 a month.
So how does that happen? It compounds over time...
Let's use an example of a Udemy course, the first month that your course goes live, you get 50 students. So you bring out a new course the following month and 5 of your students take the new course from the old course (plus your 50 students you would expect to get from a good launch strategy), so now you have 55 students in your second course, nothing exciting here huh?
Then you get to 18 months, you have been working, marketing, promoting and improving your online offerings until now you have 20,000 students in your course, then you release a new course to your much larger user base and if 10% buy your new course, you now have 200 students in your new course at launch...
What has happened is that your course has compounded, more students over time, means more money, improvement in rankings etc, so now your course is earning more money, now that 40 hours a month starts to pay off...
But the key point here is that we have to maintain that work, we have to keep investing that time until the business reaches tipping point.
Online businesses are not passive!
In week 1 the return is low, but by month 18, if we keep maintaining, keep pushing the business, looking after our apple trees, planting new trees, our apples become better well known and more popular, that is how it works, time is the single biggest element in creating a residual income.
One of the important things to understand is that it does not all happen at the beginning, you have to go through seasons, each season should see an increase in income as long as you keep working on the right things in your business, those things that drive profitability.
So keep marketing, create new content, keep up selling to your established base and you can create residual income.
The beauty of this is, that if you are working for someone at the moment, you are exchanging time for money. But if you start developing an online based residual income business and nursing it correctly, your income from that business has the potential to grow exponentially.
Your business potential is then only limited by the potential audience and your ability to market your digital products...