Sorry to be picky folks , but I believe that three different questions are being asked and answered in this thread, causing some confusion.

Q1 – How do you make money from folk music?

Q2 - How do you make a living from folk music?

Q3 – How do you make a good living from folk music?

A1 – "Without much difficulty: if you have the basic know-how, and are willing to put in enough effort."    Over the years, many people I know have gradually found themselves making a little money from their favourite hobby.   Maybe just enough to cover transport costs, plus a beer or two, but money nevertheless. (My own rule of thumb is that so long as your playing doesn't earn you enough to buy new strings, you're an amateur - once it brings in enough to buy new guitars, you're a pro. A lot of us are stuck somewhere in between.)

A2 – "With more difficulty: it takes a lot more know-how, a great deal of effort, and some luck."   Even then, you will probably go short of material rewards. We all know about folksingers hitch-hiking to gigs, sleeping on friendly floors, or busking with freezing fingers to earn the price of a meal. Many of us have tried it, or provided the lifts, the floors, or the meals for friends who were trying it. From a distance (in time, or in space) it seems an attractive bohemian life-style. But in reality, it always was, still is, and probably always will be a hard way to earn a meagre living.

A3 – "It's almost impossible: because once you start doing the things you must do in order to earn real money, you will probably have to stop making folk music (except as a hobby in your spare time – or maybe as a tax loss)."   To have secure tenure of a comfortable home, to raise children decently, to put aside savings for the day that accident, illness or age stop you working, to have a little spare cash for holidays and minor luxuries – all this takes more money than anyone (bar a tiny handful of exceptional performers) can hope to earn from making folk music. The public demand for it just isn't big enough. And to break into the mass music market, you will need to change what you do so radically that it will no longer sound much like folk music.   

If this seems a gloomy picture, cheer up: there is light on the horizon.    The key to prosperity is diversification. Many people make a significant part of their living as performers of folk music, and get the rest by other methods. Some dress up in antique costumes and provide period entertainment for heritage sites and re-enactments; some act in the theatre or on TV; some work as stand-up comedians; some become anchor-persons for talk-and-records shows on local or national radio; some write scripts, magazine articles or books. Those who write (and copyright) good songs and tunes usually make something from the royalties. Those willing to pass on their skills to the next generation earn money from schools or colleges, or in private lessons. Putting some - or all – of these income streams together can create a viable and satisfying career. Provided you have enough ability, enough energy, enough business sense - and enough luck.

Wassail!