1. Essential Personal Finance
Chapter 7
Residual income
© 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

2. Contents Introduction Earned vs residual income
Importance of assets
Risks
Sources of residual income
Property
Business
Investments
Internet
Leverage
Conclusions
© 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

3. Income Work Linear/earned income
If you stop work due to sickness, retirement, unemployment, your linear income stops!
© 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

4. Income Work Residual income
If you stop work due to sickness, retirement, unemployment, your residual income continues!
© 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

5. Celebrities and residual income
Table 7.1 Celebrities and residual income
Source: Telegraph (2008), Forbes (2013).
© 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

6. People own a system, people work for you
Sources of income
Employee
YOU x JOB = INCOME
You have a job
Time = £
No leverage
Business owner
YOU x PEOPLE = INCOME
People own a system, people work for you
People = £££
Leverage
Self-employed
YOU OWN A JOB
Time = ££
No Leverage
Investor
MONEY WORKS FOR YOU
£££ = £££££
Passive Income
Figure 7.3 Different sources of income
Source: Adapted from Kiyosaki (2002, p.176).
© 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

7. Differences between rich and poor
Rich people believe ‘I create my life’. Poor people believe ‘Life happens to me’.
Rich people play the money game to win. Poor people play the money game not to lose.
Rich people are committed to being rich. Poor people want to be rich.
Rich people think big. Poor people think small.
Rich people focus on opportunities. Poor people focus on
obstacles.
6. Rich people admire other rich and successful people. Poor people resent rich and successful people.
7. Rich people associate with positive, successful people. Poor people associate with negative or unsuccessful people.
© 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

8. Differences between rich and poor
8. Rich people are willing to promote themselves and their value. Poor people think negatively about selling and promotion.
9. Rich people are bigger than their problems. Poor people are smaller than their problems.
10. Rich people are excellent receivers. Poor people are poor receivers.
11. Rich people choose to get paid based on results. Poor people choose to get paid based on time.
12. Rich people think ‘both’. Poor people think ‘either/or’.
13. Rich people focus on their net worth. People people focus on their working income.
14. Rich people manage their money well. Poor people mismanage their money well.
© 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

9. Differences between rich and poor
15. Rich people have their money work hard for them. Poor people work hard for their money.
16. Rich people act in spite of fear. Poor people let fear stop them.
17. Rich people constantly learn and grow. Poor people think they already know.
Source: Harv Eker (2005).
© 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

10. Five wealth principles
Invest in things that go up in value.
Don’t diversify! Concentrate all your eggs in the right basket.
Wealth seekers are always on the offensive, not on the defensive.
Choose investments that are both powerful and stable.
Control is essential.
Source: Allen (2006).
© 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

11. Activity 7.3
Imagine that you have won £100,000 from the lottery. How much would you spend on the following items?
Jewellery £
Holidays £
Bank savings £
Cars £
Stock market £
Property £
Gifts to family £
Gifts to charity £
Pay off debts £
Set up a business £
Buy more lottery tickets £
© 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

12. Activity 7.4
Let’s imagine the following investors have asset holdings as follows:
Suggest the value of the assets in ten years’ time. What are the risks of the portfolios? Would you recommend any changes? How would you invest your money?
© 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

13. House prices Figure 7.4 House prices in UK, 1986-2013
Source: Adapted from ITV (2014) (for illustrative purposes).
© 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

14. US house prices Figure 7.5 US house prices
Source:
© 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

15. House prices in Asia Figure 7.6 Index of house prices in Asia
Source: Scatigna et al. (2014, p.71).
© 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

16. House prices in China, Hong Kong and Singapore
Figure 7.7 House prices in China, Hong Kong and Singapore,
Source:
© 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

17. Investing in property Table 7.2 Investing in property
© 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

18. Renting out rooms Table 7.3 Renting out rooms
© 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

19. Types of businesses Table 7.4 Different types of business
Source: Hansen (2002, p.318).
© 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

20. Examples of famous businessmen
Table 7.5 Examples of famous businessmen
Source:
© 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

21. Investment yields
Table 7.6 Yields from investing in selected companies
Source: Morningstar (2015).
© 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

22. Different types of leverage
OPM – Other People’s Money
OPE – Other People’s Experience
OPI – Other People’s Ideas
OPT – Other People’s Time
OPW – Other People’s Work
© 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

23. Financial leverage Figure 7.8 Effect of leverage on return
© 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

24. Conclusions
Residual income does not require sustained efforts from you and you can have multiple sources
It is important in creating financial independence
Residual income comes from many sources: property, business, investments, internet
All these require taking some risks
But it can give individuals time
© 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne