The Difference Between Residual Income, Passive and Linear Income

Before you know what is the difference between residual income and the other types, just know that being ignorant or knowledgeable could be the difference between receiving linear income and receiving residual income. It could also mean the difference between:

  • Being wealthy versus struggling
  • High class versus lower class
  • Being independent or needing financial assistance

Linear income is not necessarily to be frowned upon because it can provide a way for you to make ends meet to be able to support your family. Over 90% people in the world earn linear income.

The Difference Between Residual Income, Passive and Linear Income - Trading Time for Money

Linear Income is when your paycheck is determined by the number of hours you work. When you clock out from your job that's when your income stops.

Therefore, linear income requires you to continue working for money.

This is also the reason why over 90% of the people in the world are not financially independent.

Contrary to popular belief, just because someone has their own business DOES NOT necessarily mean that they receive residual income. Also included in the linear income category are those that are self-employed and independent contractors.

The reason for this is that they ALSO are only paid for the specific time that they put in.  People who earn a linear income have to be physically present in order to be paid for the work they do.

It is known by those who are financially literate that it is nearly impossible for those who earn linear income to leverage their time.  Leveraging is a huge part of why people receive residual income and become wealthy.

No matter how good of a worker you are or how much of a difference you make to the company, you can be terminated, fired, or downsized at any time. Linear income earners have limited control over their financial situation.

The Difference Between Residual Income, Passive and Linear Income - Linear Income does not last

The majority of the time, no matter how much you achieve or accomplish for your company your income remains the same while your boss or supervisors get the recognition.

Then God forbid you experience a sudden illness or get involved in a car accident that prevents you from going to work. If you receive linear income then your income would stop. This can have a DRASTIC effect on you and your family if they’re depending on you for support.

As far as longevity, linear income earners aren't able to pass their income or job down throughout their family lineage. In other words, if you suddenly want to retire you cannot dictate to your boss that your son, daughter, nephew, or niece will be taking over your position.

The Difference Between Residual Income, Passive Income and Linear Income

Passive income is income that you currently earn for doing little to nothing.

An example is when Shaquille O'Neal endorses Icy Hot products. Three months later while he is relaxing in his house he's still receiving payment every time the Icy Hot commercials are played on TV.

A famous recording artist is relaxing on the beach and is currently getting paid because the song that they recorded years ago was used commercially to promote a product.

The Difference Between Residual Income, Passive and Linear Income - Passive Income from endorsements

The Difference Between Residual Income, Passive and Linear Income - Passive Income from Music Royalties

Passive Income vs Linear Income in MLM

You may not be a famous basketball player or recording artist. You also may not be a celebrity or someone that has a powerful influence over your community. However, MLM offers both types of income (linear and passive).

The linear income comes from MLM when you sell a product. The company may pay you a percentage of that product as well as bonuses for selling that product.

The Difference Between Residual Income, Passive and Linear Income - Linear Income in MLM

The passive income comes from network marketing when the product you sell is on auto-ship or has monthly payment options.  You sell the product one time, but every time they make that monthly payment you get a percentage of it.

The Difference Between Residual Income, Passive and Linear Income - Passive Income in MLM

Linear Income is limited by hours while Passive income and Residual income is unlimited.

For example:

If you are paid by the hour (in other words trading time for money) you're limited because the most hours you can work is 24 because they're only 24 hours in a day.

This still isn't practical because it is common practice by most businesses not to have their employees work over 16 hours in a day.

Passive Income is income that is earned when there is no current work required to achieve that income.

For example:

Money that you get from tenants at your rental property - You have your tenants sign the lease agreement one time but they're required to pay you monthly payments for as long as they stay in your property.

Dividends that you get from buying stock - You invest in the company’s stock one time. But now the company has a legal obligation to make a profit to pay you dividends every month.

Residual Income is not a TYPE of income. Residual income is described as income LEFT OVER after all of your bills are paid.

For example:

You get paid $2000 a month. Your monthly expenses are $1700 dollars a month. Your residual income would be $300 a month.

Keep in mind that unforeseen expenses happen all the time. Therefore if you are limited to $300 extra dollars per month, any expenses that exceed that amount can cause extreme hardship to your family.

Common causes are:

  • Family sickness
  • Car trouble
  • Medical expenses
  • Day Care expenses
  • Sick Pets
  • Broken Laptops
  • Electrical Problems
  • Broke Cell Phone

In network marketing, as your team grows your residual income increases. Eventually, unexpected finances will not be an issue and you will start to do what many wealthy people in the world do . . . Make money while you sleep.

Importance of Residual Income

The reason why the importance of residual income is stressed among the wealthy is that it is a very important aspect that banks consider when deciding if you qualify for a Mortgage, Loan, for Line of Credit.

The Difference Between Residual Income, Passive and Linear Income - Importance of Residual Income

What banks do is determine your income then subtract all of your expenses (mortgage, rent, credit card debt, student loans, utilities, etc.). The more extra money you have left over after all of your expenses are paid would equal how favorable you’re looked upon for receiving a loan.

In other words, no matter how good your credit is or how early you pay all of your bills, if your debt to income is too high you will qualify for nothing.

MLM Passive and Residual Income

The MLM industry is one of the few that offers residual and passive incomes for the average working class citizen.

One would argue that you can receive residual and passive income by other means such as real estate, or investing in the stock market, etc.  However, these investments usually require thousands of dollars before you start to see residual income.  Over 90% of the MLM opportunities require an investment of less than $500.

Residual income earners fall into three categories:

  • Investors
  • MLM reps
  • Business owners

People in this category worked hard on building their business first, then receive their reward on the backend. They don’t have to worry about a time clock. They can be absent from their current project for long periods of time and still be paid. They can be:

  • At their children's baseball game
  • On a six week vacation overseas
  • Sleeping in, etc.

The Difference Between Residual Income, Passive and Linear Income - MLM Passive and Residual Income

In other words, they can live as someone who is on vacation 365 days a year.

Residual income is also earned by those who use leverage to their advantage.  Every single person who is employed in the world is being leveraged by their boss. Leveraging is when you use someone else's time and money for the benefit of your goal.

People Who Earn Residual Income vs Linear Income

The person who earns residual income derives it from their business or personal efforts. The positive aspect of this is since it is yours you can leave a stream of income to your children or pass the business along to your children to continue the cycle.

Another positive aspect of MLM is in order to make a residual income you have to help others become successful. This way no one can claim that you're making a bunch of money off of other people who are broke.

The Difference Between Residual Income, Passive and Linear Income - People Who Earn Residual Income vs Linear Income

In the corporate world, it is rare when you see bosses and supervisors helping their employees become successful. Usually, there is a bunch of dictating and rule setting. When an employee makes a mistake on the job they risk getting terminated. All of this happens while the boss and supervisor still get more pay and more recognition for a job well done by the employees.

The two main differences between the people who earn residual income and linear income are their mindset. People who earn linear income hustle and work long hard hours for a guaranteed paycheck.

People who earn residual income hustle and work long hard hours for freedom.

Many people think they only work for financial freedom.  However, they work for time freedom as well because many believe that time is more valuable than money.

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