What's More Important: Spending Less or Earning More?

ESI Money |

If you've been reading personal finance articles for more than ten seconds, it's likely you've heard the adage "You need to spend less than you earn."

But it goes way beyond that. There is much online debate about which is more important to financial success: Spending less. or earning more.

So, which is it? Which one is a greater benefit to your financial wellbeing?

Let's look at the pros and cons of each:

Earning More

Pros:

  • There's a bigger potential upside to your finances. In theory, your earnings are limitless.
  • Allows you to enjoy more of life's pleasures while still saving.

Cons:

  • Takes longer to have an impact. It's not like you can go out tomorrow and earn an extra $20k on a whim.
  • Opportunities to earn more could be limited. Not everyone has the background, time, and skills to earn more (or at least much more).

Spending Less

Pros:

  • Can have a quick impact on your finances. You can cut cable, vacations, and eating out today and see positive benefits immediately.
  • A greater number of people (i.e. everyone) can cut spending versus earn more.

Cons:

  • Spending can only be cut so much. There is a minimum cost of living for everyone and as you get closer to it the benefits of controlling spending go down.

As you can see, there are pros and cons to each approach. That's why the debate goes round and round and never really gets resolved.



So Which is More Important?

The truth is that they are both important and necessary to grow your net worth. But what's most important is the difference between the two: Something I like to call "the gap."

In short, the larger the gap, the better. So, to the extent that you can raise income but keep expenses constant, that's good. And to the extent that you can keep income level but cut expenses, that's good too.

But the real magic happens when you raise income and cut expenses. This makes your gap as large as it can be and super-charges your net worth's growth.

Now some "experts" say you can't impact both -- that you need to focus on one to really make an impact. But that's hogwash. You certainly can do both. In fact, that's what most millionaires do -- they grow their income while controlling spending to make their gap as large as possible. They then invest that gap and watch their wealth take off.

How to Make the Most of Each

Ok, so both spending less and making more are important. But what's the best way to do each?

There are obviously thousands (millions?) of tips for saving and making money, but here are the top options for each in my opinion:

  • For saving money, you simply need to pick and choose where to be frugal. Decide what's important to you and spend on that (in moderation). For stuff that's not important, cut as much as you can. This is a good balance between living and enjoying your life while also keeping costs low. I call it moderate and selective frugality.
  • For making money, your career is where it's at. Your career is your biggest financial asset. By simply taking a few steps to grow your career, you can make an extra million or two over the course of a working lifetime.

If you concentrate on these two tips, you will be well ahead of most people financially and on your way to making your gap as large as possible.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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