With some amount of trepidation, you decide that you’re finally going to get a grip on your budget. Armed with months of bills and receipts, you painstakingly recreate an outline of your spending plan for the year. After adding up all your expenses, you’re shocked to see that the total monthly income needed to finance your lifestyle is way in excess of your current earnings.

“That explains why I’m so dependent on my credit cards every month,” you mutter to yourself. “I’ve got to reduce these expenses if I’m ever going to get out of debt.”

Determined to cut back all unnecessary costs from your overblown budget, you examine each expense category for items that you can do without. Unfortunately, your search reveals that you already exist on the basics – any reduction will only lead to deprivation for you and your family.

Frustrated by your budget-trimming attempts, you decide to take a hard look at the income side. “My salary is just not enough,” you admit. “What I need is a way to make some more money.”

As you rack your brain for ideas to fill the earnings gap, you realise that every option you think of requires a lot of time to be accomplished. You work nine to ten hours on the job, your commute takes up another two hours, and the children’s activities consume the rest of your day. How on earth are you going to find the time to make more money?

Working by time limits your income

The need to earn extra income is a common concern for most people. Whether you require additional income to balance your budget, reduce your debt, save for goals, invest for retirement, or live a more relaxed lifestyle, the challenge is usually the same – how can you work more when you’re already so busy?

One solution to this problem is to try to earn a higher rate from the hours you are already working. However, in today’s tight economy it’s practically impossible for most employees to get a pay raise, much less switch jobs to receive a better income. Many self-employed people also struggle to increase revenue, for although they can theoretically work harder and earn more, they are bound by time constraints and their physical limitations.

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The underlying issue that all employees and many self-employed persons face is that they earn income by trading their time for dollars. So the effort they put out for a day earns money only once; to make more money they have to repeat the work activity. If they reduce or stop working, then the income is negatively affected. This form of earning is called linear income.

Earning repeat income is possible

The only way to sustainably earn more in the 24 hours available in a day is to create an income stream that is not dependent on your personal, direct efforts to produce money. Money that you earn without physically working for it is called passive income. Creating a passive earning source will usually require a lot of hard work initially, but the satisfying end result will be a system that continues to earn while you sleep.

One way to earn money passively is to create a residual income source. Residual income simply means that once you have worked on a project, it continues to pay you over and over again. To generate this type of money, you have to create some item that people will want to purchase repeatedly, or invest in an asset that will continually supply an income.

Here’s the difference between creating linear income where you physically work to get paid and focusing on residual income. Let’s say you have a talent for teaching mathematics and wanted to earn income part-time. You could choose to set up tutoring sessions after work and earn an hourly rate, or you could create several training CDs or DVDs and sell them through stores and schools.

In the first scenario, your initial effort will reap quick rewards as your students pay you immediately. However, it is difficult to increase your income this way, as you can only physically teach a limited number of people. In the second option, you may work for a long time creating the material without seeing any returns, but once the project is completed you could reap lifetime earnings.

Other examples of linear income versus residual income are: a musician who gets paid for doing live shows and one who produces an album that can be sold repeatedly; an artist who designs one painting for sale and one who uses a piece of artwork to make hundreds of T-shirts or postcards; a doctor who treats chronically ill patients every day or one who creates and markets a natural remedy to relieve their symptoms.

If you are looking for a means to earn extra income, try to use your talents to create an asset that can pay you repeatedly. Next week we will continue to look at other ways to generate passive income.

Copyright © 2010 Cherryl Hanson Simpson. No reproduction without written consent.

Originally published in The Daily Observer, May 27, 2010