EP 178: Residual Income vs. Passive Income

We're diving deep into two of the most buzzworthy terms floating around the Internet: residual income and passive income. You might think these are only attainable if you’re an artist, an actor, or someone with extraordinary talents, but that's not the case. In this episode, I break down the true definitions and practical examples of these income streams, focusing on how regular people like you and me can leverage the stock market to create wealth. 

Transcript

Jason Brown [00:00:00]:
The thing that I want you to hear. If you consider yourself normal, normally, you just you work a job. You you got a family. You got no special talents. You don't run a football up and down the street. You're not a good actress or actor. You're not a good singer. There is still hope for you, my friends.

Jason Brown [00:00:24]:
Most people want it, but have no clue how to get it. So today, we're talking about the 2 most popular buzzwords that float around the Internet, and that is residual income and passive income. Now I took the liberty of Googling residual income and passive income, and these are the definitions that popped out and stood out to me the most. So according to Investopedia, residual income is money that continues to flow after an initial investment of time and resources has been completed. And I thought that was a pretty good definition because it's money that continues to flow, keyword here, after initial investment of time and resources has been completed. So some examples include artist royalties, rental income, interest income, dividend payments. But when you talk about residual income, you have to think about it in context because residual income can be in different used in different buckets and categories. It's most often misused in real estate or the stock market.

Jason Brown [00:01:35]:
They say residual and passive are kind of the same, which is not necessarily true. And residual income can be used when you think about your personal income. And so it's the money that continues to flow after an initial investment of time and resources. Well, if you go to work and put in some time and resources, then every 2 weeks, a paycheck will flow. So that will be residual, because if you go to work and put in some time and resources, you'll get another paycheck, and that's the money that you have left over. So when you talk about personal finance, residual income is technically the money that you have left over after putting in that initial investment, of time and resources, AKA going to work your job. But when most people think about residual income, that's not what they think about, or at least that's not what they wanna think about when they're like, I want some residual income. You want to most people wanna be like that artist who makes a hit song one time, and then they get paid over and over again.

Jason Brown [00:02:39]:
Like, every year when they play Mariah Carey's Christmas song, you're like, alright. Mariah Carey gets a piece of that. She gets a residual income from doing the work one time, but as it gets continuously used, she gets a check from it. That's the residual income that I think most people want. But the problem becomes most people aren't artists. They don't make hit songs. They don't create hit TV shows or are great actors and actresses where they're running reruns. And so how do us regular people, get into the residual income game? Well, remember, one of the examples was rental income, interest income, and dividend payments.

Jason Brown [00:03:23]:
There should be some alarm bells going off because 3 of those actually pertain to the stock market, which is why I believe the stock market is one of the best industries to get into as a regular person. By the way, if you're new around here, I'm stock market coach and option trader, Jason Brown, and you'll listen to the 5 year millionaire podcast where we our goal is to help you start your journey and become a millionaire within the stock market within 5 years. And so when you break down the stock market from a residual income standpoint, this becomes a very powerful vehicle for you to be playing in because rental income, first thing that comes to most people mind is owning a home and renting it out. However, I can attest that you can get that same effect or return in the stock market, but most people don't know that you could own stock and actually rent it out. That means if you have at least a 100 shares, you can do something called a covered call where you can rent your stock out to other people. You can sell a call option against those shares, and you can bring in a income every single 30 days if you would like to, which is super powerful strategy. It's just something that's not being taught in school. It's definitely not something that's being taught by all the real estate gurus because they would want you to buy their real estate course.

Jason Brown [00:04:44]:
They want you to obviously go buy a house and and do it. But the problem with buying a house and I'm not knocking real estate is I talked about this on our most recent 5 year millionaire challenge. I talked about how, you know, to get a good house or a decent house, it may cost you 50, a $100,000 to get a d, you know, maybe a decent home, probably more than that. And let's just say you only maybe you bought a house that's a 100,000, $200,000. Let's just say that. And then you're you have to come up with 10% down. So you have to come up with 10 to $20,000 down, which is fine. But the question is, how many of those houses can you buy? Typically, only 1.

Jason Brown [00:05:29]:
Well, when it comes to the stock market, you can own a plethora of stocks, and you can come up with a smaller amount and still play in the rental income game. Obviously, if you own stocks, you can play in the interest income game. Right? So you can earn interest on oh, oh, not just on the stocks. Let me back up here. If you have money in your bank account, you can earn interest from just having it sit in the bank account. But also in the stock market or in an investment account, there's a little button or something that you can sign up for that says, when your money is not being invested, they ask you, what do you want us to do with the money? And if you give them permission to act as a bank and loan that money out, which is how they loan margin money out, which is money that people can borrow to invest in the stock market, They're using your money. They're using collectively all the money that's sitting in brokerage accounts that's not invested. They can actually loan that money out.

Jason Brown [00:06:28]:
And for loan allowing them to loan that money to other traders, they're saying, hey. We're gonna pay you interest. They're gonna pay you an interest income on that. So just by having it in the stock market if it's not invested. Now if it is invested, the third example was dividend paying stocks. And so dividend paying stocks is basically where every quarter, typically, a company, declares a dividend, and they're paying could be 1%, 2%, 5%. When you add it up, there's an annual yield that you get. So basically, over 4 quarters or every 3 months in a year, 4 times a year, you would get this dividend payment, and it would come out to an annual yield of 1 5 10%, whatever that may be.

Jason Brown [00:07:14]:
10% is a little bit high to find a 10%, dividend paying stocks. But the point is there's 3 different ways for a normal person. That's the thing that I want you to hear. If you consider yourself normal, normally, you just you work a job. You you got a family. You got no special talents. You don't run a football up and down the street. You're not a good actress or actor.

Jason Brown [00:07:37]:
You're not a good singer. There is still hope for you, my friends. That's the point that I'm trying to relate to you. There's still hope for you to get involved in the residual income game, and you can get involved in that game even if you're not handy or know nothing about buying houses. You can actually do it in the stock market by owning stock, renting it out, having cash in your investment account, uninvested that earns interest, and by buying dividend paying stock. So 3 different ways you can get into the residual income game as an investor. And the beautiful part about doing it as an investor is you're not gonna get a call in the middle of the day that the toilet is broke. You're not gonna get a call in the middle of the day that your renters have tore up the the home or set it on fire or something like that.

Jason Brown [00:08:26]:
You know? So it allows you a little bit of a peace of mind that it's kinda tucked away in the stock market working while you're working as the market's open from 9 to 9:30 AM to 4 PM Eastern Standard Time. Now let's transition over to passive income. So passive income, I Googled this one. According to bank rate, it says this is money earned from a source other than an employer or contractor. So source money earned other than your job. And then the IRS goes on to say that passive income can come from 2 sources, rental property or a business in which one does not actively participate in such activities, but you could be getting paid, for example, from book royalties or stock dividends. But the point is it can come from 2 sources, rental property or a business in which you do not actively participate in. So I want you to think about that because, again, when we hear rental property, all my real estate people go, yes.

Jason Brown [00:09:33]:
But all of us people are like, I'm not into real estate, not in the houses, not in the evicting people, not in the fixing toilets, not in the trying to find a contractor, trying to find a property management, all that stuff. We started to say, well, then how here here we go with that property again. But think about what rental property is. Rental property does not necessarily mean a house because the property itself could actually be stock. I just told you that you could actually rent stock out. So the property doesn't necessarily have to be a house. I mean, the property could be a car. You could have a rental car that is property that you're getting passive income from.

Jason Brown [00:10:16]:
Again, this let's go back to that initial definition, which fits both. It's money that continues to flow after an initial investment of time and resources. So they're basically saying after you buy that car and you rent it out, you made that initial investment. You put some time into building a website or putting it on Turo, and now money can flow to you every time people rent that car. So the the property does not have to just be a house. In our case, as stocks and option traders, the property can be stocks. So we can get that passive income, that elusive thing that everybody wants, but no one knows how to get, you can get that just by participating in the stock market. And so the stock can be the property.

Jason Brown [00:11:03]:
You can rent it out by selling covered calls against the stock that you own. But let's talk about the second way that the IRS says that you can earn passive income, which is through a business which you do not actively participate in. Well, let's break that down. Where can you actively earn passive income from a business that you don't own, that you don't run, that you do not participate in? Well, 1, you could start a company yourself, hire a CEO, build out a system, have somebody else run it. How many of us have the time to do that if they're working a full time job or never been trained in business, don't have any start up capital? But how many of you use something like this right here, an iPhone, and you understand now that, wait a minute, I can go buy Apple stock, and I can participate in the business where I don't have to invent the phone. I don't have to build Apple Stores. I don't have to hire or fire Apple employees. I don't have to source the products from China.

Jason Brown [00:12:10]:
I can just invest in the company Apple, and I don't run it. I don't participate in the daily operations of it. But as people who are smarter than me run the company, makes higher and firing decisions, determine what, iPhone needs to come out next, how bet good the camera needs to be, where AI is going. As they make those decisions, I can passively get income as the stock price increases. And if it pays the dividends, I can passively get income while I'm still working my full time job from a business that I have no direct involvement in. And that's a super I mean, I I need you to get this because that is super powerful. You see, I once heard I once heard a mentor. It was in a book, actually, but I heard this at a live seminar.

Jason Brown [00:13:06]:
Mentor said they took a look at the McDonald's system. And there was a speech given, and they were like, how many of you can make a better hamburger than McDonald's? And everybody raised their hand. McDonald's is garbage. The burger is not that good. It's not even real meat. I mean, whatever. They just you know, you could hear the grumbles in the room. Everybody raised their hand.

Jason Brown [00:13:27]:
They can make a better burger than McDonald's. Then the question was followed up with how and I believe this was a lecture that Ray Crock gave, you know, who was, like, the milkshake guy who then took McDonald's global or whatever. Don't quote me on that, but I believe that's this story comes from that. And then they asked the room full of people, how many of you can build a better system of delivering hamburgers? And the room went quiet. Nobody raised their hand. You see, most people are focused on they can build a better hamburger. They can they they got a better grill in the back. They can season the meat better.

Jason Brown [00:14:09]:
What they this is farm raised cattle beef. They're focused on making a better hamburger. But can you build a the biggest real estate empire in the world, which is what McDonald's has done? They have built a huge real estate empire, which almost every corner that you drive by, you see the golden arches. So they built a huge real estate empire and a huge branding empire where, you know, when you see the golden arches, you can go in there and get a Big Mac, and the Big Mac is gonna taste the same no matter where you buy it from, no matter what neighborhood, state, city, probably country. Okay? The Big Mac is gonna taste the exact same. And so that's the question. Can you build a better business system? Can you go and compete and try to buy real estate across the street from McDonald's? Or could us regular people go and type in the ticker symbol MCD, which is McDonald's ticker symbol? And can we then just buy the stock? And now we can participate in getting passive income because every time they come out with a new milkshake, every time they come out with a new burger, every time they expand into a new country, it's like we get to expand into that country. We get to sell a new milkshake.

Jason Brown [00:15:29]:
We get to sell a new burger, and we don't have to manage employees, franchisees. We don't have to deal with any of that. And so that is the power of going after the passive income from the stock market. So when you think about residual income and when you think about passive income, I want you to think about them now in terms of how do I move my active income? Because that's what most people make. You make active income. You have to get active for it. You have to go to work. You have to put in some time for the dollars, which is nothing wrong with that.

Jason Brown [00:16:05]:
It's just when these buzzwords fly around the Internet and everyone's like, I want residual income. I want passive income. Do you really understand what you are saying you want? And if you don't, hopefully, you do now after this episode. But if you really understood what you're asking for, the simplest way for you to get into that game and start to get, again, some money that continues to flow after an initial investment of time and resources has been completed. The stock market is your vehicle, and more specifically, stocks and options is your vehicle because then you're in a game where you can do the rental income strategy. You also can protect your portfolio if the stock market goes against you, and you can most definitely participate in a business that you do not actively run the day to day operations from. And that is how wealth gets built. For you to be able to go still work your full time job but have your money working for you in an entirely different company that you are not technically responsible for the day to day operations, It's a beautiful thing.

Jason Brown [00:17:16]:
So let me know in the comments. Are you going after residual income and passive income? And if so, what do you now think about the stock market as that vehicle? Because I'm telling you, I think it's sweeter than real estate. I'll see you on the next episode.