Residual vs. Linear Income
Residual and linear income are both forms of earning a living through work and time investment. Earning a linear income requires a higher level of active engagement on the part of an employee, while a residual income can be the result of a brief period of intensive labor to produce an original creative work. How a person chooses to manage money earned through either income can determine which source truly lasts longer.
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Linear Income
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Linear income is an exchange of money for a devotion of time. An employer agrees to pay a worker a wage in exchange for certain enumerated services based on the employee's level of education or accumulated expertise within a given industry. How much the worker earns depends on the type of employment. An employer may elect to pay an employee in a number of ways, including an hourly wage, a fixed salary or a commission wage based on total product sales.
Work Tied to Pay
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With linear income, an employee only earns a wage while she is actively working for her employer. When her employment ends, so does do the paychecks. As an employee ages, a linear income can limit earning power as a worker is able to perform less and less work and therefore will earn less and less money. This is why a retirement fund or pension plan is so important for a linear income earner. An employee who has not properly prepared for retirement through establishing a private retirement account or buying into an employer's private retirement plan is at risk for financial ruin when she loses her linear income.
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Residual Income
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Residual income is a form of continuing cash flow from royalties tied to a copyright, investment, patent or creative performance of original material. A patent or copyright holder does not have to be present or actively engaged in a work task to earn income from his original creative work or product invention. For example, a novelist earns continuing royalty payments from the sale of his original creative work without the need to actually continue writing to generate income from the already established book. Residual income does diminish over time, which may require an artist or inventor to produce new work to kick start the flow of money.
Residual Income Limitations
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While a residual income does not end when an employee stops working, the income is still linear in that it only continues to grow as the worker develops the investment. For example, a stock portfolio requires active management to ensure investments can grow while avoiding bad stock purchases that can destroy the portfolio's total value. The same is true for a novelist who write a best-seller but fails to produce any new work. Over time, the writer's name and notoriety may diminish along with sales of the writer's one creative work.
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