When adults and teens learn that there is a big difference between "earning" money and "making" money, they get excited because they've just learned there is an alternative to having a job for the rest of their lives.
The concept of making money often gets a bad rap because people sometimes associate making money with get-rich-quick or pyramid schemes. Making money, however, means something entirely different.
Let's contrast making money with earning money to learn the difference and see why understanding that difference is so important when it comes to becoming financially free.
What it means to earn money
You earn money when you trade your time and energy for money. In other words, you work for an hour, you get paid for an hour. It doesn't matter whether you're being paid by the hour or you receive a monthly salary - you're still paid by someone else in exchange for your time and energy.
It's important to remember that when you're earning money, you are usually dependent upon some other entity - be it an individual, business, non-profit organization or government div - for the money that supports your lifestyle. Also remember that, generally speaking, your time and energy are finite resources. There are only 24 hours in a day and you only have so much physical and mental energy to go around.
An additional distinction is that when you earn money, you only get paid once for every hour you work. Remember this as we explore the idea of making money next. This is where it starts to get interesting (and a whole lot more fun).
What it means to make money
Making money is when you use your own time and energy and a bit of creativity once, and get paid over and over and over again. Making money puts you in the driver's seat. It allows you to be independent, not dependant on someone else controlling your wealth potential on a regular basis.
Making money can look like ...
- Creating a new or improved product the market needs and wants that you can sell over and over again.
- Writing a book and getting paid every time it sells, sometimes for the rest of your life.
- Coming up with an invention that you sell or license to a person or company and for which you receive an ongoing royalty.
- Writing a play that you license to a production company, who turns it into a TV show or movie.
- Composing a jingle for a commercial where you get paid every time it plays.
- Investing in rental properties and renting them out for more than the mortgage and other expenses.
- Investing in a parking lot where you rent out the same spaces day after day after day.
- Installing ATM machines in stores where you get a small percentage of every transaction.
- Building an Internet marketing business that you put on autopilot that creates monthly income (cash flow) for you.
- Investing in dividend-producing stocks or other interest-producing financial instruments that pay out regularly.
You get the idea. The point is that you do it once and get paid over and over and over for it. Some people refer to this as passive income as opposed to earned income, but anyone who has their money invested in an income-producing asset knows it's rarely completely passive. There is usually some, or much, work that must be done to ensure that the asset continues to produce a regular income on which you can live.
Which comes first, earning money or making money?
That depends on whether you believe in the saying, "It takes money to make money." If you believe this, then you're probably going to earn money first in order to invest it into the types of assets you choose to use to make money on a regular basis.
However, if you believe that it doesn't always require your money to make money, you might be able to start making money right away by using what is referred to as "other people's money." This concept is called leverage.
Lastly, sometimes it doesn't take much money to create an income-producing asset. Sometimes we're simply in the right place with the right idea surrounded by the right people and what happens seems easy and miraculous ... and maybe it is!
Why is leverage so important?
Leverage is when you utilize other people's time, energy and money to make YOU money. And leverage is a great thing. It's also how many financially free people get, and stay, financially free.
Using someone else's money to make you money could look like:
- Hiring a ghostwriter to write or help you write a book quicker than you might be able to do yourself.
- Finding an inventor and creating a partnership where he/she invents and you market the inventions, or visa versa. Joint venturing is a wonderful way to start making money.
- Taking your idea for a play to someone who is already a playwright but who hasn't been successful financially yet, and then partnering with that person to get the play written.
- Hiring someone to write music for you while you develop relationships with advertising companies looking for jingles.
- Learning how to spot profitable real estate deals and then working with an investor who doesn't have the knowledge or time to find the deals but does have the money for the down payment - and maybe borrowing the balance you need to buy the property from a lender.
- Borrowing money for a piece of real estate from a bank or other investor to help you invest in cash-flow-producing real estate.
You get the idea. You don't necessarily have to have all the money yourself in order to invest in an asset that is going to make you money on a regular basis. Quite often, it is nice when you control the whole process, but using leverage to partner with someone in the beginning of your making-money career can be a great way to get started.
So why is it so important to understand the difference between earning money and making money?
Eventually, once you're making enough money to cover the expenses of your chosen lifestyle, you're what we call "financially free." At this point, it's completely up to you to continue earning money (i.e., giving up your day job) to live off the money you're making.
You can also choose, like most financially-free people do, to continue building the amount of money you make so you can take this extra money and do a whole lot of good in the world.
While you're at it, if you have children, make sure that you teach them these concepts while they're young. It may just make the difference between having an adult child who creates a financially success life and one who, at some point, has to come live at home for awhile to get back on his or her feet.
What are you waiting for? Go figure out how to make some money, will you!
Elisabeth Donati is the owner of Creative Wealth Intl., LLL, creator of Camp Millionaire and recipient of the 2010 Financial Educator of the Year Award from the National Financial Educators Council. She is an author of several financial literacy books, a speaker and coach and expert on financial literacy for kids and teens. For more information, visit www.CampMillionaire.com.