When we think of ways to improve our financial situation, we know we can earn more or spend less. But are both approaches equal? Although on the surface it would seem so; on closer examination it is clear there is a large disparity between the two.
Exiting the consumer rat race has a far bigger impact on your ability to achieve financial freedom than does increasing your earnings.
The reason for this is twofold:
1) Earnings are taxed; heavily.
2) Earning increases influence your wealth only while you are earning. Once you quit or retire the affect stops. Learning to be happily frugal has benefits that extend for the rest of your life.
Allan Roth’s article, Financial Wealth – It’s Time not Money explores this concept. Roth gives the following example of a 50 year old that can reduce spending by $10,000 for the rest of her life or increase earnings for the balance of her career.
A 50-year-old woman can make $10,000 a year more and will retire in 15 years, which translates to $150,000. But if a third goes to taxes, she is only left with an additional $100,000. On the other hand, if she spends $10,000 a year less and has a 33 year life expectancy, that translates to $330,000 in savings.
A dollar saved is $3.30 earned
So in the above example, lowering annual expenditures by $10,000 had about a 3.3 fold benefit over earning $10,000 more. That means a dollar saved is worth far more than a dollar earned – in the above example it equaled approximately $3.30.
Many of us try to out-earn our past or present spending habits. This seems particularly true of high earners. The problem is the more we earn the more we spend. If you are currently earning at least average wages, focus the majority of your early efforts on reducing your expenses in order to win.
Plugging the hole in your bucket before filling it with earnings is so much more effective than the alternative.
2 thoughts on “Earn More or Spend Less?”
This is a really good point. By retraining yourself NOT to spend frivilously or rather unneccesarily, you develop an entire new set of beneficial skills. We have become an environment of instant everything. I see, I want, I buy….. recipe for disaster! Going through an extreme financial crisis got me to retool my spending habits. It made me listen to my “Jiminy Cricket” – do you really need that? A very simple example is that I read a lot. I used to buy my books, not just paperbacks, but hardcover books. I thought they looked nice on my bookshelves (yes, plural, had to have many because I had so many). I felt it reflected on my character. I had lots, cause I read lots, made me seem intelligent? Wrong. Not only did I spend unnecessarily, require huge amounts of storage for an item that I only occasionally revisited… but the public library is free (I’m already paying for it in my taxes!) and I can get as many books as I want at any time!
My biggest challenge in my spending habits now, is that I am able to be generous and contribute to fundraising or other causes. So I donate to every Tom, Dick or Harry cause that comes along. While I firmly believe in the “Pay it forward” concept – do random acts of kindness and those acts will return to you multiplied, I must concentrate on those acts that don’t have a price tag! Pulling out my check book at every turn is not the answer.
Good Points Anne, We too have rediscovered the library and benefit from both not paying for books and not having to deal with the keep, sell or donate issues after they are read.
As for giving, try choosing three causes that really touch your heart. These should be things that you would be willing to invest your time in as well as your money. Now work on saying “no” to the rest.
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