What is Residual Income?
Residual income is the amount of net income generated in excess of the minimum rate of return. Residual income concepts have been used in a number of contexts, including as a measurement of internal corporate performance whereby a company’s management team evaluates the return generated relative to the company’s minimum required return. Alternatively, in personal finance, residual income is the level of income that an individual has after the deduction of all personal debts and expenses have been paid. Residual income will earn you money even when you are sleeping. Owning rental units, collecting royalties or investing in a savings and investment program are examples of such passive income.
Residual Income measures net income after taking into account all required costs of capital related to generating that income. Other terms for residual income include economic value added, economic profit and abnormal earnings.
Residual Income for Equity Valuation
In equity valuation, residual income represents an economic earnings stream and valuation method for estimating the intrinsic value of a company’s common stock. The residual income valuation model values a company as the sum of book value and the present value of expected future residual income. Residual income attempts to measure economic profit, which is the profit remaining after the deduction of opportunity costs for all sources of capital. Residual income is calculated as net income less a charge for the cost of capital. The charge is known as the equity charge and is calculated as the value of equity capital multiplied by the cost of equity or the required rate of return on equity. Given the opportunity cost of equity, a company can have positive net income but negative residual income.
Residual Income for Corporate Finance https://endurancesms.com/
Managerial accounting defines residual income in a corporate setting as the amount of leftover operating profit after all costs of capital used to generate the revenues have been paid. It is also considered the company’s net operating income or the amount of profit that exceed its required rate of return. Residual income is normally used to assess the performance of a capital investment, team, department or business unit.
Residual Income for Personal Finance
In personal finance, residual income is also known as disposable income. The residual income calculation occurs on a monthly basis after all monthly debts are paid. As a result, residual income often becomes an important component of securing a loan. A lending institution assesses the amount of residual income remaining after paying other debts each month. The greater the amount of residual income, the more likely the lender is to approve the loan. Adequate levels of residual income establish that the borrower can sufficiently cover the monthly loan payment.
Seven super smart ways to build residual income.
- Bulk SMS business, become a reseller of bulk SMS and see money your way every day. There are many Bulk SMS companies out there that you can partner with but Endurance SMS is recommended as the price is cheap and the service is reliable
- Royalties from intellectual property, such as books and patents Subscriptions, advertisements, donations or affiliate links from your blog or website
- Transferring the rights to a song you recorded, a book you wrote, a software program you created or a gadget you invented to a company agreeing to pay you a percentage of each copy of your work sold
- Purchasing an office or apartment building and leasing or renting out the properties
- A savings and investment program that earns interest
- E-book sales
- Stock photography royalties
Become A Bank
In the past month we’ve covered quite a few peer to peer lending companies. You can now help students get their degrees or help give consumers personal loans. The market is getting pretty saturated with P2P lending companies so as an investor you can take your pick. Since you now have the ability to lend people money you get to bank on the interest rates. Plus, most of the P2P companies allow you to spread your investment through several borrowers therefore mitigating your risk.
- You do have the potential to be financially independent if your residual income produces enough money.
- Having residual income allows you to do more important things with your time. Whether that’s a hobby or another job, making money from your residual income stream won’t be the primary focus of your life.
- No matter what, you will have a constant flow of income (however large or small it may be). This is critical if you get injured or sick, can’t work because of another emergency, or if you just want to take an extended vacation.
- You will make money no matter where you live, unlike a linear income which ties you down to your position.
Of course, before the money starts rolling in you will probably have to put a lot of time, effort and money into the business or project. You’ll need a lot of patience and determination to see the residual income in the future. Instant gratification is not possible when it comes to residual income.