There can be a lot of confusion about which terminology to use when talking about residual or passive income. In short, they are the same, however passive income as a phrase is much easier to use in marketing. Let’s look at some definitions to see which ones fit when combined with the word income afterward.
Residual definition: remaining after the greater part or quantity has gone.
passive definition: accepting or allowing what happens or what others do, without active response or resistance
When you look at these two definitions the one that’s most appropriate with the word income is residual. Examples of residual income being royalties, rents, dividends, etc are generally considerably smaller than the purchase amount (or sale income for the seller).
Discretionary income is a term that seems to have been forgotten in the last few decades.
discretionary definition: available for use at the discretion of the user
For marketing purposes the use of the word passive touches on the fear of loss and fear of missing out that we all have. You see a large lottery value(big being subjective of course) and can’t help but buy a ticket. You see bitcoin, stocks, low real estate value, etc, and think “I’ve gotta get in on this, or I’ll miss out”. The reason for that is we have this subconscious belief that the way wealth is created is based on chance.
Residual income
There are can be obtained in a number of different ways. The most common way we think of residual income is from real estate. The 2nd most common is from owning a business, while other options are those listed above.
Passive income
While you can create residual income and then get paid multiple times from it afterward, there is almost no income options that require no more activity to maintain it, therefore the term passive is not accurate.
Summary
Residual income and passive income are being used interchangeably, however, the more accurate term is residual income. Discretionary income is the money you get to use however you choose after paying expenses.