Residual Income – Why it takes so long – Build Equity

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Some people run when they hear the term, residual income. Let’s just make it clear. Your insurance agent relies on residual income. How do you evaluate something that pays you an ongoing revenue stream, but pays so little up front? Everyone in the world seems to start out spending a certain number of hours at work, x hours; are getting paid, y dollars, and are always computing, x times y = total income. Residual income is a future income stream that is part of the payment for work done now. There are sophisticated methods to compute the value of future income. I won’t bother explaining such things as the present value of future income, but I will give an overview why they are different and ‘can be’ outstanding sources of income. Note that I said ‘can be’ not ‘are’.

Residual income usually starts slowly and builds over time. Many people can’t adjust to the idea that they are putting time into the business, e.g. four hours per week, and are making so little during the first several months. Let’s look at that.

What would you invest now to get an extra $500 per month for the next 10 years? When you invest in stocks, bonds, or any interest bearing investment, you are ‘making’ a similar calculation or decision. There are many people who invest in real estate for cash flow in areas that will show little or no increase in value. They are doing the same thing. Well, we have heard about sweat equity.  That is not different than investing part of your time and some energy to build something for the future. Think of accumulating future residual income like compound interest. The difference is that it can be a lot quicker.

How many years did you go to college, let’s call it sweat equity as an investment into yourself, and how much do you invest financially into college? All that investment is done before you are paid one dime from future work. In actuality, you pay large sums of money and go to college with the hope or belief that you will be rewarded with a good job at the end.

Every year (not just this year’s recession), it amazes me when I’m in the club room of a Hyatt, Westin or Marriott and some father says, ‘my son/daughter just spent four years in college and can’t find a job’. I usually ask, ‘what was his major’? You can guess by now: Art History, English, etc,, with ‘that’s what he/she wanted’. My next question is, ‘who paid for this’? Was this a good investment? Even the investment in college requires a good choice of a specialty. The decision to spend time in a particular field of study is a choice which affects future income.

Network marketing is a business. Someone invests a very small amount and builds the business. The key factor in any business that relies on residuals is “How long will the customers and fellow consultants continue to buy the product(s)”. In the arena of consumable products the statistics say that 80% will drop out in three months. So it is crucial to find a company whose product breaks this rule. Most people drop out because they do not understand how to evaluate the benefits of the business.

Ambit Energy sells gas and electricity. It sells at highly competitive rates. People may be in financial trouble; their house may even be in foreclosure. But, I am willing to bet that if you pass that house at night, the lights will still be lit and the air conditioner will be running during these terrible summer months.

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About Thomas O'Grady, PhD

Thomas F. O'Grady received his PhD in Mathematical and Statistical Economics from the University of California at Berkeley. Since the age of 12 he's been interested in entrepreneurial activities. Full Details

Comments

  1. Great Article. I have made my life’s work building Residual Income. It has made me both Wealthy and Free! Residual Income builds Time Freedom.

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Disclaimer: The analysis, views and opinions expressed in this blog are personally my own and do not necessarily reflect nor are meant to imply in any way they are the opinions of Ambit Energy.I am an Executive Consultant with Ambit Energy. Analogies used are to assist with general understanding of the postings and are only to be examples.

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