Earning More vs. Saving More – Which Matters The Most?
As stated on my website’s homepage, I have chosen to have a “Treat Yourself” section on my blog. Most personal finance blogs put heavy emphasis on “paying yourself first” (by way of saving/investing). Living frugally is the name of the game, and spending is frowned upon. I tend to have a slightly different approach. As evidenced by my Finish Rich On A Shoestring post, one doesn’t have to live like a miser to enjoy the benefits of wealth accumulation. Being a natural born spender, my preference goes to the approach that favors earning more. I have to admit, though, that researching the subject has opened my eyes to a number of things, which I have summed up in this post.
Spender Or Saver?
Before you can successfully assess where you’re going, you have to know exactly where you are. And that means knowing whether you’re a spender or a saver. Spenders love money for the things it buys them. They prefer to have something concrete like cars or trendy gadgets over having something as abstract as savings. They can get into trouble when they spend everything they have - or more. This category of people has the most difficult time saving money. Spenders are often spontaneous, disorganized and a whole bunch of fun to hang out with. They’re also the ones most likely to face bankruptcy as a result.
Without savers, who would the rest of the world borrow from? They create a fortune in the bank very quickly, while still living a comfortable life, sometimes even on a tight salary. These types are organized and not impulsive buyers. They don’t like risk and require a cushion of savings for their own peace of mind; they’re often conservative, over-plan their lives and have a tough time getting dates. But they can be too conservative and often avoid investments that could actually make their money grow! They also may postpone enjoying their money for so long that it is soon too late.
Of course, if you’re a spender, you’ll instinctively favor the earn more approach, whereas if you’re a saver, you’ll rightfully think that your best bet lies with the save more approach. Both parties are right in their own way, but that doesn’t mean that they can’t draw from each other’s strengths and achieve even more. Let’s take a closer look at both approaches
Earning More
Going with the earn more approach is pretty much straightforward. You do what you have to do to bring in more money (second job, getting a raise, income generating hobby, home business, freelancing, you name it…).
Increasing your income simply gives you more room: depending on how you go about generating that extra income, your earning potential could be unlimited (that’s what happens with passive or residual income, meaning you don’t have to physically work to make money).
But as with all things in life, there’s a flip side. The biggest flaw with the earn more approach to financial freedom is that it doesn’t change your spending habits. I read somewhere that contrary to popular belief, more money doesn’t change you, it just amplifies everything about you. So if you’re the type that spends, for example, $110 on earnings of $100, doubling your income is not necessarily a good thing and might even drive you further into debt or bankruptcy.
The tax implications of earning more are not to be neglected either. Any additional income is subject to tax, and you’re only going to get the remaining amount after Uncle Sam takes his cut. Furthermore, you might fall into a higher tax bracket and face a proportionately higher tax bill. The point is that you will always get but a fraction of the additional money you’re bringing in. That leaves you with less money to work with to achieve your financial goals.
Saving More
The first and most beneficial aspect of the save more approach is that it sharpens your money management skills, improves your decision making and strengthens your willpower. Training yourself not to spend when you have abundance and saving up for rainy days are more important than having a high paying job when you consider that 75% of Americans (regardless of income) are 3 paychecks away from bankruptcy.
Contrary to the earning more situation, saving allows you to free up after-tax dollars. To illustrate this, if you’re in the 25% tax bracket, you achieve roughly the same result with a savings of $75 as you would with an extra $100 in earnings. The old saying “A penny saved is a penny earned” was coined before taxes were instated. Nowadays a penny saved is worth quite more than a penny earned.
But there’s only so low you can go with expenses. There’s a minimum required for subsistence. It’s no fun trying to conserve your way to financial freedom. There’s only so much you can do to cut expenses before it becomes detrimental to your health (not to mention your overall mental equilibrium).
In the same way the taxman takes his cut of any earnings, inflation eats away the value of your money, slowly but surely increasing your expenses as prices creep higher year after year. At 3% a year, it means that your expenses will double roughly every 24 years. Keeping up with the savings with an income whose value is consistently eroding might prove quite a challenge.
A Two-Stage Approach
It becomes obvious that no sound Finish Rich plan can incorporate one and neglect the other. In the end, your best bet is to use what I like to call a two-stage approach.
In the short term, you should teach yourself to save more. It’s more important because without it, the size of the paycheck doesn’t matter; you will spend it all, and probably rack up some debt. For financial stability, you just can’t escape the necessity of spending less than you make. Those freed up dollars will be used to pay off debt (thus further decreasing future expenses) and/or for investment purposes (thus increasing future earnings)
On a long term basis, on the solid foundation built by the saving more approach, increases in earnings will then allow you to keep saving/investing and STILL constantly upgrade your living standards.
Now THAT is music to my ears.
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