Secure Financial Independence By Raising Your Residual Income
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The goal of financial independence is one that many share and there are many ways to get there. One common theme is to secure financial independence by raising your residual income. This is one that I too, look to do but have found that most people are getting residual income confused with another term. Today I want to sort all of that out and show you how you can raise your residual income and bring you one step closer to financial freedom.
How can you secure your financial independence by raising your residual income?
For most this comes to down to either making more money or spending less. Residual income is a calculation of all of your income minus expenses. Whatever is left over is your residual income. This income can then be put to work for you through investing or starting a business. Thus, bringing you closer to financial independence.
Every month one of the key numbers I look at is residual income since it will tell me at a high-level if I spent too much that month. If I did, no problem, I’ll just cut back a little more the next. If I didn’t then no harm done and I’ll change nothing. That is the premise of my budgeting tactic in two sentences.
Seem simple right? Well why do people often confuse it?
What Is Residual Income
Many people aren’t familiar with the term residual income but most know what it means using a different term, disposable income. Yes, it’s as simple as taking all of your income minus your expenses to give you residual income. It’s often confused with being a type of income like active, passive, or investment but it’s merely a piece of an equation.
For anyone wanting to improve their financial situation, they’ll want to get this number as high as possible. Meaning that they have positive cash flow thus giving them financial freedom.
The sad fact is that most people don’t do this and instead rely on hope or feel with their finances. Personally, I’m a numbers guy and I need to see them in front of me to believe it. I know I have many opinions but I think it’s safe to say this one is a fact. You will be more successful in managing your money if you get the numbers in front of you.
Below is an example of what I mean by this calculation:
This is an exercise everyone should do, AT A MINIMUM. For most, this number will be calculated each month to help tell them a story or what is working and what isn’t. For some, they avoid it because the number is negative.
If your residual income is negative then don’t worry. It is what is is and you’ll need to figure out why. I often have a month or two negative when a big bill hits like property insurance. This is why expanding it out over a year is so important.
Residual Income vs. Passive Income
All too often people get the terms residual income and passive income confused. These are not the same thing as passive income actually feeds into your residual income. I’ll explain what I mean a little later with an equation.
For years, I was one of these people I would used the term interchangeably and thought my residual income was just my cash left over. Which it is.
There is no use in blowing this section up with a bunch of filler. You get it, you’re smart.
What Should You Focus On?
Where your focus will be matters on your personal situation. You should never cater your situation to 100% resemble someone else’s. Instead, take parts and pieces from many different individuals to form your own system.
Personal finance can be broken down into the equation below.
(Active Income (Your Job) + Passive Income) – Expenses = Residual Income
For the most part, I believe people need to focus on managing their expenses. It’s no secret that people love to spend money as fast as they get it and getting that under control can be a problem.
There will be a point where you can’t cut your expenses anymore without sacrificing your quality of life.
This fine line separates being smart with your money and being simply cheap. Don’t be cheap, no one likes someone who is cheap.
When you’ve brought all of your expenses down as much as you can then you need to maximize your income. There are a couple of different ways to do this but they will take longer than the direct effect that cutting certain expenses will
Above I discussed passive income and what that entails. I’ve done many articles on that topic and would suggest you give them a read after you’re done here. Here are some of those:
After that, it comes down to your job. This one can be tricky because working around office politics of improving your current role in a company can be complicated.
This first, and easiest thing you should do, is asking for a raise. Now, before you go marching in your bosses office making demands make sure that you are in the right position to be asking for one. I would highly suggest reading I Will Teach You To Be Rich. The author, Ramit Sethi does a great job going into the details of this, specifically the negotiation.
The most severe way to raise income is to look for a new job altogether that pays more. This may not be available to most of you but to some, it is and will have an instant impact on raising your residual income.
The Bottom Line
Residual income isn’t as complicated as people seem to make it. In fact, it’s just the end of a simple math equation that everyone should know. If you’re tracking your finances in any sort of way then chance are you already know your residual income. But be sure!
If you’re trying to retire early or gain financial independence then it is vital that you understand how to raise your residual income.
The higher you can get that number now and the longer you can have it at that level, the quicker you can achieve financial independence.
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