Are you standing at the door to wealth but can’t seem to find the right key?
There are many keys on the key ring that can unlock the door to wealth, but you have to know which ones they are and how to use them correctly.
In this article I’ll focus on the “residual income” key that many have discovered can be used to enter the inner sanctums of the wealthy.
But before I go too far, I should probably define what I mean by “residual income,” (also called passive or recurring income).
While there are perhaps a number of definitions for “residual income,” I will be using the term here as follows:
“Residual income is income that continues to be earned after the initial effort has come to an end.” In other words, it can be thought of as the process of making a sale one time but getting paid over and over again.
How can this be? That is, how can you make one sale and get paid over and over again? Well, let’s take a look at some common examples of residual income.
An insurance policy. When you buy an insurance policy, you normally pay premiums monthly, quarterly or annually. You made one purchase, but you continue to pay as long as you maintain you policy. The insurance company earns a residual income from you.
A service subscription such as a pest control, lawn maintenance, or web hosting contract. When you purchase a pest control, lawn maintenance, or web hosting service you normally again pay a monthly, quarterly, or annual fee. As long as you continue your service, you continue to pay the fee. The service company earns a residual income from you.
A membership subscription such as to a membership Website or a club. To continue your membership, you much continue to pay membership fees. The membership entity earns a residual income from you.
In all of the above examples, the sale was made only one time, but you continue to pay the company over and over again.
Residual income is distinguished from “linear income,” where a single payment for a single one time purchase is made. For example, if you have an hourly job, you are exchanging one hour of your labor time for an hourly pay rate. You must work each hour to get paid. If you stop working, you stop getting paid. Your income is linear.
However, if you sell memberships to a Website and your members pay a monthly fee to belong, then you continue to collect their monthly fees as long as they continue to remain a member. You made the sale one time but continue to collect an income long after the initial sales effort was completed. This is an example of “residual income.”
Which would you rather have, a residual income or a linear income?
Generally, whenever possible, you should try to earn a residual income that will continue to grow over time as you make individual sales. If you put in a consistent effort toward earning a residual income, you will find that your income will compound itself as the amount of residual income continues to grow.
For example, let’s take a look at the difference between selling a $29. ebook and a membership to a Website with a $29 monthly fee. We’ll assume that both sellers began their sales effort on 1 January and continued the effort for six months.
With the sale of each ebook, the seller earns $29 but then has to make another sale to earn another $29. Hopefully, the seller has some backend or follow on products to sell to each customer in the future, but many do not. So each sale stands alone. Let’s also assume that the cost to make each sale (including Web hosting fees, merchant card fees, advertising, etc) come to $4 per sale. Our merchant thus earns $25 net per sale. We’ll assume that 10 sales are made per month so over the six month period he made 60 sales. So for 60 sales, he has earned $1,500.
Now, let’s take a look at how the membership site might do.
Each membership sells for $29 per month and the cost to make each sale is the same $4 per sale so the site owner earns the same $25 net per initial sale. However, he continues to earn the $29 each and every month that the buyer remains as a member and there is no sales cost for the subsequent months. We’ll also assume that our membership site makes 10 sales per month and that each buyer remains a member for 4 months on average before dropping their membership. Now lets take a look at the numbers.
Month 1 = 10 sales for $250
Month 2 = 10 sales for $250 plus $290 residual income
Month 3 = 10 sales for $250 plus $580 residual income
Month 4 = 10 sales for $250 plus $870 residual income
Month 5 = 10 sales for $250 plus $870 residual income
Month 6 = 10 sales for $250 plus $870 residual income
The total income for the six months comes to $4,980 plus there is still a continuing income that will come in from sales that were made during months 4, 5 and 6.
Which would you rather have, the $1,500 made as linear income or the $4,980 plus earned through sales with a residual income tail? The sales effort was the same.
As you can see from the above example, residual income can quickly surpass linear income if your sales effort remains constant. So, keep on the lookout for good residual income opportunities, they can be your key to opening the door to increased wealth.