Earning versus creating — they seem similar, especially when talking about money. We go to work, and earn money. But you can also think of it as going to work, and creating a paycheck. It’s similar, right?
In a way. But there’s a distinction that we’re going to run through: The difference between earning money and creating it. The former is when we earn our salaries or paychecks. We go to work, clock in, and at the end of the pay period, we get our checks. The latter has to do with putting our earnings to work and using them to create more money on top of it.
Why is it important to discuss the differences? Because if you want to reach your financial goals, and do so as efficiently as possible, you’re probably going to need to do more than simply earn money. You’ll need to create it, too, even while you’re sleeping.
Money earned: Your paycheck
As mentioned, “money earned” refers to the compensation you receive for going to work (or however else you earn it). Your paycheck is earned money, for instance, as is the $20 your neighbor may give you for mowing their lawn once per week. You put in the work, and you earned that money.
There are a lot of ways to earn money, too. But for the vast majority of people, it’s going to come through a paycheck. You may have your own business, for example, and earn money through the business, or you may not even have a job, and earn an allowance from your parents by doing chores or work around the house.
The specifics don’t really matter — understanding what “earned money” means, does.
Money created: Investing and earning interest
“Created” money is different from “earned” money, as mentioned. While no one is a real alchemist or magician, with the ability to create money out of thin air — although, if you really could pull a quarter from behind someone’s ear, and do it repeatedly, you’d probably be able to create a good chunk of change over time!
Instead, “created” money is the money that’s created through little or no effort — such as interest accrued on our savings, or gains or returns on our investments. Remember: There’s a reason that they call compound interest the “eighth wonder of the world!”
For example, let’s say you stash $1,000 in a savings account earning 1% interest annually. After one year, you’d have $1,010. That $10? That’s what we’re referring to when we talk about “created” money. You didn’t need to do anything — the money created itself!
Read more: Saving Versus Investing: What’s the Difference?
Similarly, if you buy 15 shares of Microsoft stock for $100 for a total of $1,500, it gains 50% over the course of a year, then you decide to sell it. Your Microsoft stock sale nets you $2,250 (before capital gains taxes!). You’ve created $750.
This is why it’s so important to make money your employee. Put it to work for you. And the more money you put to work, and the longer you let it go to work, the more money you’re likely to create. Obviously, there are no guarantees, but the odds are definitely in your favor if you opt for a long-term saving and investing strategy.
Also, don’t expect every stock you invest in to gain 50% every year — that was just an example!
But you can see the difference between earning and creating money, and how using the two in conjunction with one another can supercharge your abilities to reach your financial goals. Obviously, if you’re creating money without putting in any additional time or effort, you should reach those goals a lot faster.
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