There is a difference between “earning” money and “making” money. Although the words are interchangeably used, they are not the same thing. Knowing the difference helps you understand how to achieve financial independence.
Earning money is a result of exchanging your time for cash, payment, or a paycheck. You earn money by performing work for someone else–a business-owner, employer, or a client. In the gig economy, you earn money by performing tasks for others, designing logos, or driving people through services like Lyft.
Making money is different from earning money because it's an alternative to having a job to earn a paycheck. Typically, making money is associated with MLM (multi-level marketing), get-rich-quick, or other make money fast schemes. But there are legitimate ways to make money we'll discuss later.
Let's start with the basics and explore the difference between earning and making money.
How do you earn money
Earning money requires exchanging your time and skills for money. You're paid based on a number of hours you've worked. Whether you're paid based on the actual hours you've worked or a salary–you're earning money.
When you earn money you're dependent on someone else or another company to earn your living. How much you earn is limited by the number of hours you work regardless of the amount you're paid for the hour. Remember, time is finite and therefore the only way to earn more is to become more valuable–getting paid more per hour or a higher salary.
Earning money is important because money is central to how our society works. You need money to pay for necessities and some luxuries and overall living expenses. Additionally, earning money is necessary to pay towards debt and student loans.
David Carlson's founder of YoungAdultMoney.com and author of, Hustle Away Debt, writes about the multiple ways to earn extra money to pay off debt, save money, and build wealth. It's a great book about side hustling while continuing to earn money with a primary job.
How do you make money
Making money is using your time to create a product or service that continues to make money for you. It's not dependent on exchanging more of your time for money. In fact, you're not limited to how much you can make.
You can make money by creating a product that people need. For example, you wrote a book or created a course that can be sold over and over again. These products earn the money for you. Of course, you'll spend some time promoting the products but you're not limited to how many products you can sell.
Making money can include income from licensing creative work, money from rental property, dividends from investments, advertising revenues from a blog, or a business that generates revenues.
In Chris Guillebeau's bestselling book Side Hustle, he defines a side hustle as an opportunity to make money by turning a skill or talent into a business. He describes a process of identifying your skill and making a profit within 27 days.
Can you make money from an activity associated with earning money? Yes. For example, you started designing logos and built a large clientele. Instead of designing all the logos yourself, you hire another designer to do the work for you. With this example, you charge your clients $100 and pay your logo designer $60. You've made $40.
Some people refer to making money as passive income or earnings from a business. The truth is making money requires time and work too.
Can you make money from other people's money? Yes, when you borrow money from someone else or from a financial institution, it's called leverage. Leverage is when you use credit to make a purchase that makes you money. For example, you bought a second home using a mortgage and flipped the house to another buyer for $20,000 more than your purchase price. You've just made $20,000.
Why is it important to know the difference between earning money and making money?
When you make enough money to cover monthly living expenses, you've entered financial independence. Financial independence means working is completely voluntary.
Your goal should be to find ways to make money to regain back all your time. If you believe it takes money to make money, then you'll need to create a plan to use your earned money on money making activities.