In order to know what residual income is, you need to understand what linear income is. Linear income is the kind of income that people have today. Linear income is the pay that you receive whenever you work. This type of income continues only as long as you work. Once you stop working, the cash stops flowing. Residual income, on the other hand, is based on something that you did in the past that still helps you make money long after.

What are examples of residual income?

1) Royalties - This is often the term used for the residual income that an artist or an author receives. Authors who write a book often make a deal with the publisher to give him or her a percentage of the books sales. If the author wrote a truly great book, then that author would continue to receive income from that book long after it has been published. Royalties are often paid per annum and are computed based on the amount of sales that the books has enjoyed. This means simply that as long as the book is sold, then the author would have an income. This also goes the same for hit songs. Think of Elvis Presley: his residual income continues long after his death. In fact, his residual income is enough to support his descendants.

2) Dividend - These are shares of income distributed by a corporation to its stockholders. If you invest enough money in a corporation, you could enjoy the dividends that your stock can bring you. In this type of residual income, you get to enjoy the benefits of making a smart investment as long as the company exists but you do not have to work for that income. Dividend income, though also depends on the actual company since it is up to the company when to declare dividends.

3) Interest - When you lend money, it is only natural that you charge interest. In this type of residual income, you don't have to work to get your income, you merely have to wait for the debt to mature and you can collect your income. This is the most commonly used type of residual income today.

4) Commission - This type of residual income is made use of by multi-level marketing companies in order to attract more customers.

This is how this works: let's say Mary has joined a company which sells soap. Mary paid the company one dollar in order to get the right to sell and to recruit. Mary recruits John. John, of course, pays the necessary one dollar fee. As a commission for Mary, she receives residual income from the one dollar that John paid. As an addition to this, she gets another percentage for every recruit that John makes and a percentage for every recruit of every recruit and so on. Because of recruiting John, Mary now has a residual income. By recruiting John she can now enjoy having an income without actually selling the soap.

Residual income sounds great, doesn't it? Well, what you need to understand is that you have to be very careful not to fall into scams. You need to truly understand how residual income works before you try to reap its benefits. If you don't you might end up wondering where all your money went.