Understanding the differences between capital gains and residual income should be common knowledge for anyone, let alone an entrepreneur. Unfortunately, from elementary to high school, we are conditioned to accept capital gains as the most realistic means for making a living. Each have their pros and cons, but I want to make it very clear that it is a matter of choice as to how you make your living. I think people tend to lean towards capital gains for reasons I explained in “If Money is Too Taboo then Try Adding a Dash of Value”, where I was talking about how money is stigmatized as the root of all evil and how it should be “earned”. If you are self-employed and making a living at what you are passionate about, then I can see how that mentality could work for you. In “Entrepreneurs Create Options to Gain Control” I explain why entrepreneurs are interested in opportunities that create residual income. Residual income is about gaining control, and attaining control is about gaining freedom, but the best way to make that happen is to create options that offer value.
Feel the Burn as You Earn
Capital gains are made from trades. Trading your hours for dollars at a job (whether it’s for an employer or your own business) is a form of capital gain called earned income. That can also be seen as a labor trade. Selling objects for a cash profit is a trade that creates capital gains. The easiest way to distinguish capital gains from residual income is that capital gains are a one-time lump sum payday. Even if you get paid every week from your job or from a client of yours, it’s because you continue to trade your labor in exchange for those one-time lump sum payments. Whenever there is a trade that takes place that results in monetary profit, that’s a capital gain.
Pros
· Quickest way to make a profit
· No commitments necessary
· Easiest income stream to create
Cons
· If you stop, so does your income
· Your time is dictated by the demand of your labor
· The amount you can earn is defined by a market cap
Examples of Capital Gains in Each Income Class:
1. Employment Stream: Working for an Employer or Working for Clients
2. Real Estate Stream: Flipping Property, Property Management (job), Wholesaling
3. Paper/Commodities Stream: Trading Stocks, Bonds, Mutual Funds, Precious Metals, etc.
4. Business Stream: self-employment, selling your business
Making a Living Even When You Sleep
Residual income is also known as passive income. This is income that does not require your active labor in order to gain. The best way to illustrate this is to think of a vending machine as an example of residual income. The vending machine is has a system for collecting payment from customers and delivering the goods, without the owner having to be present to complete these transactions. So capital gains come from labor, and residual income comes from systems. Business owners are individuals who own systems. Perhaps they may also oversee some operations, and even get their hands dirty every now and then, but it is not required in order for the business to continue to run. The residual income from these business systems is called revenue. Two other forms of residual/passive income is interest and dividends.
Pros
· You can own a system that does not require your ongoing labor to produce
· The system can be an asset of value and can be traded/sold for Capital Gain
· You can make interest/dividends/revenue throughout the day, even when you sleep!
Cons
· Takes more time (usually without being paid) to build a successful system
· Large amounts of capital required in order to yield substantial interest/dividend returns
· Income can be volatile
Examples of Residual Income in Each Income Class:
1. Employment Stream: Working for yourself (creating products, Creating Businesses, etc.)
2. Real Estate Stream: Renting or Leasing Property, Easements
3. Paper/Commodities Stream: Lending, Stock Dividends, Product Royalties
4. Business Stream: Selling digital products online, Ad Revenue, Any Automated System
Capital gains are made from trades. Trading your hours for dollars at a job (whether it’s for an employer or your own business) is a form of capital gain called earned income. That can also be seen as a labor trade. Selling objects for a cash profit is a trade that creates capital gains. The easiest way to distinguish capital gains from residual income is that capital gains are a one-time lump sum payday. Even if you get paid every week from your job or from a client of yours, it’s because you continue to trade your labor in exchange for those one-time lump sum payments. Whenever there is a trade that takes place that results in monetary profit, that’s a capital gain.
Pros
· Quickest way to make a profit
· No commitments necessary
· Easiest income stream to create
Cons
· If you stop, so does your income
· Your time is dictated by the demand of your labor
· The amount you can earn is defined by a market cap
Examples of Capital Gains in Each Income Class:
1. Employment Stream: Working for an Employer or Working for Clients
2. Real Estate Stream: Flipping Property, Property Management (job), Wholesaling
3. Paper/Commodities Stream: Trading Stocks, Bonds, Mutual Funds, Precious Metals, etc.
4. Business Stream: self-employment, selling your business
Making a Living Even When You Sleep
Residual income is also known as passive income. This is income that does not require your active labor in order to gain. The best way to illustrate this is to think of a vending machine as an example of residual income. The vending machine is has a system for collecting payment from customers and delivering the goods, without the owner having to be present to complete these transactions. So capital gains come from labor, and residual income comes from systems. Business owners are individuals who own systems. Perhaps they may also oversee some operations, and even get their hands dirty every now and then, but it is not required in order for the business to continue to run. The residual income from these business systems is called revenue. Two other forms of residual/passive income is interest and dividends.
Pros
· You can own a system that does not require your ongoing labor to produce
· The system can be an asset of value and can be traded/sold for Capital Gain
· You can make interest/dividends/revenue throughout the day, even when you sleep!
Cons
· Takes more time (usually without being paid) to build a successful system
· Large amounts of capital required in order to yield substantial interest/dividend returns
· Income can be volatile
Examples of Residual Income in Each Income Class:
1. Employment Stream: Working for yourself (creating products, Creating Businesses, etc.)
2. Real Estate Stream: Renting or Leasing Property, Easements
3. Paper/Commodities Stream: Lending, Stock Dividends, Product Royalties
4. Business Stream: Selling digital products online, Ad Revenue, Any Automated System
