Disadvantages of Residual Income

When you're paid by an employer on a linear basis, it means that you receive a set salary for your work. Residual income is a continual stream of income for work that you've already performed or produced. It is a very productive way to build wealth, but you should be wary of potential disadvantages.

Residual Income Example

One common industry where individuals receive residual income is the entertainment industry. Actors, singers and screenwriters sometimes agree to distribute work in the present in exchange for continuous residual payments in the future, also called royalties. Also, when artists allow other parties to use their artwork to sell posters or prints, for example, they receive royalties from those parties. In many cases, residual income is tied to a copyright or patent.

Hard to Prove

When an individual agrees to a residual payment structure, he is sometimes at the mercy of the distributor. He must trust that the distributor is making proper payments as agreed upon. It is often difficult to track when the residual payment provider, such as a distributor or publisher, actually makes a sale. For instance, if an independent musician has an arrangement with a publisher to receive residual income for each sale of a song, it can be difficult for the musician to confirm how many sales are made on a monthly or yearly basis.

Declines in Income

In many cases, residual payments can decrease or plateau over time. Sometimes uncontrollable external factors can negatively affect your residual payments, such as a change in economic climate or a shift in trends among consumers. In short, it is not always a reliable income arrangement that guarantees a permanent flow of money.

Suggestions

You can avoid many of the potential challenges and surprises involved when agreeing to a residual income arrangement by getting all the details in writing. Before agreeing to a residual agreement, check the reputation of the provider or distributor that you plan to work with to see how consistent the provider has been with other clients. Also, prepare for sudden drops in this income source and develop multiple income streams. Diversify.