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Making More vs Saving More

by Mike Collins on January 24, 2014 · 23 comments

in expenditure, frugal, income

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earning more vs saving more

The following article is from Mike, our staff writer

When Joe and I first talked about the possibility of me being an RB40 contributor, he asked me a few financial questions to see if I’d be a good fit.  One of those questions was:

“Which do you think is more important? Saving more or earning more?”

This was a real no-brainer for me because I had just discussed this exact topic over a glass of wine with some friends a few nights earlier.

The obvious answer is that you want to earn more and save more.  Remember, the simple way for anyone to build wealth is to spend less than you earn and invest the rest.  Saving money and increasing your income are both vital parts of the equation, and if you can combine them you’ll reach your financial goals that much faster.

But that’s kind of a cop-out answer isn’t it?  It dodges the question rather than answering it.

So how did I answer Joe’s question?

Simple.  If I was forced to choose between saving more and earning more I would rather earn more.

Don’t get me wrong.  I’m all for being frugal and making the most of your money.  You should definitely look to trim your expenses wherever possible.  The problem is there’s a limit to how much you can cut.

For example, let’s say after taxes you bring home $2,000 per month and your expenses (rent, insurance, food, etc.) come to $1,500 per month.  You’re currently saving $500 a month.

But in order to reach your financial goals, you decide you need to start saving $1,000 a month.

Can you trim your expenses by $500?  Maybe.

You can choose a less expensive cell phone plan, cancel the expensive cable movie package, car pool with your neighbor, stop eating out, and cut every possible penny from your expenses.  But there are two problems with that.

First, while you won’t mind eliminating some expenses you’ll probably have to do without some things you really want to keep.  Depriving yourself of everything you enjoy is not a formula for long-term success.  Like crash dieters who eat nothing but rice cakes and water before splurging on bacon cheeseburgers and fries, people who take frugality too far are doomed to failure.

Take our example one step further and assume you needed to save $2,000 a month.  You obviously can’t save your entire salary since you need food to eat and a place to sleep.

So the only way to increase your savings and reach your financial goals while still being able to afford the things you enjoy in life is to earn more.  You can do that by getting a promotion, working a part-time job, freelancing, or finding a side gig to help you earn extra money.   Doubling your income might be a stretch, at least at first.  But with a little creativity you should be able to find a way to bring in at least a few hundred bucks a month.

Life is all about balance and I don’t think it makes sense to eliminate all of the good things in life.  After all, what’s the point of working hard if you never get a chance to enjoy yourself?  I’d much rather focus on earning a little more and making smart choices so my family and I can afford to eat out or go to the movies now and then.

What about you?  Do you think it’s more important to earn more or save more?

Joe> It’s definitely important to do both. However, my take is spend less, then earn more. You really need to get your expense under control first. If your spending habit is not under control, then earning more will just mean spending more. In the long run, earning more is more important, but when you’re starting out saving more is the key.

Mike Collins is a freelance writer and blogger who specializes in personal finance topics. He’s also a husband and father of three children who keep him very busy.  You can read more about his quest to achieve financial freedom for his family at WealthyTurtle.com

photo credit: flickr ugardener

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{ 23 comments… read them below or add one }

sendaiben January 24, 2014 at 12:49 am

I think you are right, but there is a very important caveat, and that is that if you are not able to save, making more doesn’t help you (’cause you are just going to spend the extra).

So I would say that learning to save more is probably more important, but once you have that mindset, earning more is going to make more of a difference than incremental saving.

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Mike Collins January 24, 2014 at 6:21 am

You and Joe each make a good point. Earning more won’t help if you continue to increase your spending. Being able to control your spending is key to achieving financial freedom.

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sendaiben January 24, 2014 at 12:50 am

And Joe said it first, in the addendum to this article :)

[read the footnotes before commenting... read the footnotes before commenting]

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awakeinwa January 24, 2014 at 3:21 am

I would say invest aggressively. Make your money work hard for you is the most important, trumping cost cutting and earnings. The power of compound interest is a mighty force too few take seriously.

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Mike Collins January 24, 2014 at 6:23 am

Compound interest is certainly powerful and investing is another key to financial independence. The key is to have money to invest. If you’re living paycheck to paycheck you need to either cut your expenses, increase income, or both.

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awakeinwa January 25, 2014 at 3:46 am

Of course to even play the retire early game, one has to have the discipline to cut expenses and be judicious with income. The question really is in the real world environment of income inequality, stagnant wage growth, albeit low inflation, how does one really get to retire early, by 40 or at least semi-retire within a decade.

One approach advocated by likes of Mr Money Mustache is to move to a low cost part of the country and cut expenses down to 25k. Any number of things wrench that approach, starting with underwater mortgage many have to contend with. It can get depressing pinching pennies to only barely stay afloat. On the other hand, getting a heart attack timing the market isn’t a solution either.

I think the simplest way is to take a multi-asset mutual fund approach and not rely on investing in the “total market” e.g. VTI which yield single digit returns that really is better than nothing but certainly doesn’t do justice toward early retirement. Many more retire early aspirants could do better even if they set aside $100 a month and split it between a small cap aggressive fund and large cap value fund after meeting the initial $250 or so initial funding requirement.

Consider if one just left their money in the popular VTI fund since the trough of the great recession yielding 25%. Versus a prudent small cap would have nearly doubled the performance at nearly 50%. Or Starbucks would have yielded 6X better performance at 133% annually. Google Finance link below visualizes these differences.

Of course we had a great run those past few years and one can’t expect4 such great returns. But the more important takeaway is if you plot this monte carlo style any number of time periods, the fact is small caps outperform significantly. Investing $100 a month appreciating such economic history so one’s money compounds an order faster than cost-cutting and earning can do alone. Earnings and cost cutting both have pretty low, well bounded and defined limits, and will only get you so far.

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retirebyforty January 25, 2014 at 3:51 pm

I was assuming people would invest with their extra money, but I should have made that clear. Thanks for pointing it out.

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awakeinwa January 24, 2014 at 3:30 am

From The Millionaire Next Door:
“A characteristic that determines if the individual is a UAW (Under Accumulator of Wealth) is their belief about investing. A UAW will usually state the following about investing: “it’s hopeless,” or “I never have the time needed to make it pay off,” or “we have never made so much… but the more we earn, the less we seem to accumulate.” Other remarks might include, “Our careers take up all of our time,” or “I don’t have 20 hours a week to fool around with my money”. A UAW does not spend a considerable amount of time evaluating their investment strategies. On average, they’ll invest only 4.6 hours a month evaluating their investment portfolios. This is about 83% less than the amount of time a PAW (Prodigious Accumulator of Wealth) allocates to financial planning. Minimal time dedicated to financial planning is a leading indicator of a UAW.”

This is particularly striking a blind area for retiring early aspirants, when more time should get spent to grok basic macroeconomics vs clipping coupons or pinching pennies to ensure pretty decent returns.
Financial Times: Academics reveal the secret to 14% returns
http://www.ft.com/intl/cms/s/0/e07e17fa-fab4-11e2-87b9-00144feabdc0.html

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awakeinwa January 24, 2014 at 3:42 am

I comment on this having just gone through the work figuring out whether I should focus on earnings vs growing our money pot. Albeit our net worth is slightly over a million at age 39/38.

But ensuring we squeeze just few % more out of the market investing in multi-asset mutual funds or companies was worth more than earning a 100K+ salary with the requisite raise.

We focus on driving down steady state costs, shopping at Costco, eating out half as much, forgoing new cars, etc. But the only reason my wife works while I take care of our 3 year old and grow our money pot is for health insurance.

We plan to halve our expenses, retire by next year end, sign on Obamacare, and return to California to be closer with family and friends. But to secure our retirement, I would never be happy unless we had spent a lot of due diligence ensuring a minimum 14% steady state return over time.

I yielded 49.81% for 2013 which I will bank for a rainy year.

In sum, spending more time to evolve into a smarter investor is the most important task at hand, followed by cost cutting. Otherwise, you forgo the power of compound interest to work on the numbers that really matter over decade’s time.

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Andrew@LivingRichCheaply January 24, 2014 at 8:55 am

I agree with Joe that if you don’t have your spending in check then earning more will often just lead to lifestyle inflation and more spending. I think earning more and spending less of course is the best combo, but I think spending less is somewhat easier to accomplish. Cutting unnecessary things from your life and stopping money leaks is easy…well at least I think it is. To find a new source of income or to increase your income might be a little harder…starting a side hustle, work another job, more hours, etc.

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C. the Romanian January 24, 2014 at 9:33 am

I’m siding with “earn more” too. It is true that most people, once they start earning more, they also start spending more, but if you know how to manage your finances, it’s the easy way to go. And, in my opinion, the best way :)

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EL @ Moneywatch101 January 24, 2014 at 9:37 am

I say both as well, and if you can figure that out then you will be above the curve. But I think being a good saver, is partially something you are good at inherently. Thus earning any amount does not change that. Those that have it put a greater value on saving instead of spending the excess $$$. I have spoken to people who don’t have it, and all they hear is what is on sale and or what they want.

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Divi Me Up January 24, 2014 at 3:50 pm

Cool post. Very thought provoking! I think for me it depends on income level. At low income levels, its better to earn more. As income rises, saving more becomes more important. For me, I would have to take on considerable additional stress/workload to increase my income significantly within my industry (no interest in changing industries and would have difficulty even matching my income in another industry without at least obtaining quite a bit of new work experience). Starting out, increasing my income was more important but now I am working on the saving side. Thanks for the post.

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Insourcelife January 27, 2014 at 12:19 pm

This is exactly how I feel as well.

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Liz January 25, 2014 at 2:53 pm

I am a salaried employee so I can only make so much at my day job. However, I have been focusing more on earning side income and am slowly starting to see some benefits from this. I completely agree with you- you can only cut out so much from your budget before you begin to deprive yourself. So it’s important to manage your spending but within reason.

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retirebyforty January 26, 2014 at 11:28 pm

It’s great that you’re earning more on the side. Keep at it!

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Mike Collins January 27, 2014 at 4:21 am

That’s great! Earn more and save more at the same time and you’ll be in great shape.

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Moneycone January 26, 2014 at 5:44 am

Like everything else in life, it is a fine balance! Excellent post Mike!

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Jon_Snow January 26, 2014 at 6:41 pm

We do both. My wife and I make 12k monthly. We save about just shy of 10k of that.

This is a sure recipe for Early Retirement. I still fully intend to be done with work this year at 42. The only thing that could derail this is a 2008 style financial crisis. Barring that, I’m done. Blog incoming. Everyone else has one, why not me? ;)

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Mike Collins January 27, 2014 at 4:20 am

Wow, saving over 80 percent of your income is amazing!

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Felix Lee January 29, 2014 at 2:11 am

Making more does not mean that saving more and being able to prepare for the future. The usual scenario is that saving more means spending more which is a bad habit. I’d still prefer saving more because that what prepares us for the future.

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Mike Collins January 29, 2014 at 7:07 am

The key is to make more but without increasing your spending. That way the additional income can go towards saving and investing.

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Joey January 30, 2014 at 8:30 pm

My first thought was (A) that both making more and saving more are the same. But considering tax, then (B) saving $X more would be better than making $X more since you will likely have to pay tax on $X. Finally for me, (C) I think doing both is best.

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