It’s the age old question of personal finance: is it better to spend less or earn more? When faced with these two options, it’s important to understand the pros and cons of both, and why some may lean in one direction and others the opposite.
Ultimately, though, the question is BS, for reasons I outline below. Still, let’s entertain both sides of the debate and see which one wins.
In Favor of Spend Less
A penny saved is a penny earned, right? Well, not really.
This is especially not the case when you can cut something out of your life permanently. Consider a semi-frivolous expense of Amazon Prime. Do we really need two day shipping on everything? Probably not.
If we cut that out, and don’t replace it with other spending, we’re saving $99 a year. That may not be a ton, but consider this.
If you follow the 4% Rule, that $99 reduced expense actually means your nest egg could be $2500 smaller without breaking a sweat.
Again – not huge money by itself when you’re talking big things, but they all add up.
Switching to SlingTV instead of cable saves us $50/month. That’s $15,000 less we need to save for retirement. If we cut out cable completely, that’s another $10k or so less than if we kept our old cable service.
Those in favor of spending less often cite a few key reasons for doing so.
- The process is quick and easy.
- It can be semi-permanent and reduce the amount you need to save for retirement.
- Spending is critical to control regardless of your income.
So far, good arguments from the Spend Less camp.
In Favor of Earn More
On the opposite side of the coin are the folks who strive to earn more. The basis for their argument is simple. Enjoy the things in your life that may cost money, but just earn enough to pay for them AND still save for the future and hit your goals.
This is appealing for a few reasons. First, earning more money (at least to a point) is almost always seen as a good thing. At some point people may consider it excessive. Realistically though if you’re asking this question, you’re not at that point.
Second, earning more money allows for greater flexibility. If you decide you don’t want some of those expenses in your life then you can cut them. But nothing’s stopping you from keeping them if you can earn more to hit your goals.
There’s also the favorite argument of the Earn More Campers – while you can save money, you can only do so to a point. Earnings potential, on the other hand, is limitless.
Looks like the Earn More camp came armed with some good arguments.
Who Wins: Spend Less or Earn More?
Here’s the deal though with all of this. Earning more and spending less are not mutually exclusive. You don’t need to choose one or the other – you can do both.
You can ALWAYS outspend what you earn – always. If you think it’s not possible just organize everyone you know to send all their money to me and I’ll prove you wrong. 🙂
That means that focusing just on the ‘earn more’ side – after all, it’s got essentially limitless upside potential – could be undermined by overspending. Focusing just on the ‘earn more’ part won’t get you very far if you don’t have your spending under control.
Conversely, you can cut your spending back all you want, but there’s a floor. Some expenses you will just have to incur as part of living on this earth. Sure, you can reduce some – perhaps drastically by living off the grid in a paid off house.
For most of us, though, you’ll still need to pay for some stuff, and that requires that you at least earn a little bit of money.
There is no clear winner here, because there CAN’T be a winner. They’ve locked themselves into a stalemate that only is resolved by looking at the full picture.
Spending less and earning more are mere stepping stones in your financial journey. They’re two pieces of the puzzle that help get you to financial independence, but can’t do so alone.
To reach FI you will need investments, good habits and behavior, and discipline. Everything in your financial life interacts with other components.
Earning more may be a great stepping stone to building an investment portfolio. But without an investment portfolio, your earnings will be less impactful.
Spending less can help you trim the fat, but once you’re running lean, there’s nowhere else to go.
By now you might be wondering – if they’re just stepping stones, and if I HAD to answer which to focus on, what would I choose??
The MwM Answer
I think there’s an order of operations here that should be discussed more whenever this debate comes up. Both spending less and earning more are important, but it’s tough to focus on two things at once.
First, focus on the spending side of the equation. Get that buckled down and to a point where you’re not spending on things that don’t bring the commensurate value to your life. Saving money and avoiding frivolous purchases should become second nature.
Once you’ve got that on lock down, switch over to earning more. And then, kick it into high gear. Avoid lifestyle inflation where possible, and control your expenses. It’s true that your earnings potential is essentially limitless, but I guarantee that if your spending isn’t under control, you can outspend any amount you earn.
Without a solid foundation, earning more is useless – even dangerous if those earnings are temporary. But with the right footing, earning more can be immensely powerful and help accelerate your savings goals.
Our 2018 is definitely shaping up to be a ‘spend less’ year, but only in relation to our abnormal 2017 spending. I am going to start dabbling in the ‘earn more’ camp and will see how it goes.
Only by following the correct order of operations will we set ourselves up for success.
What’s your preferred strategy – spend more, or earn less? Or are you in the same camp as the MwM family??