If you’ve been reading personal finance articles for more than ten seconds it’s likely you’ve heard that you need to “spend less than you earn.”
But it goes way beyond that. That’s just the soundbite.
A bit deeper there is a lot of online discussion about which is more important to financial success: spending less or earning more?
It’s an age-old money debate, similar to paying off a mortgage versus investing more, which may never be decided. There are heated (and valuable) opinions on both sides of the issue.
I’m probably not going to sway anyone one way or the other, and that’s really not my intention anyway. I’d simply like to look at the two options and chat about them a bit.
Then the fun can begin — you can give your two cents on the topic!
Earn More or Spend Less
Before we get started, let me say that throughout this post I use “spend less” and “control spending” interchangeably. I do recognize that they have different meanings, but since they encompass the same spirit (i.e. watch/control/manage your spending), I use them both.
If you’re part of the Internet word police, please forgive me. 😉
Now let’s get started by looking at the pros and cons of each option:
Earning More
- Bigger potential upside to your finances. In theory, your earnings are limitless (though in practicality, they are limited). That said, I think people often have much more earning potential than they give themselves credit for.
- Allows you to enjoy more of life’s pleasures while still saving. For instance, if you want to save $15k per year, if you make $100k you have $85k left over for vacations, hobbies, conveniences, etc. If you make $50k, you have $35k left over. The higher income person can spend a ton more and still meet their savings goals. (BTW, this was exactly our life situation — we saved a ton, but since we had a high income it also allowed us to spend (and give) as we’d like.)
- Takes longer to have an impact. It’s not like you can go out tomorrow and earn an extra $20k on a whim. At least not if you don’t want to risk jail time. 😉
- Opportunities to earn more could be limited. Not everyone has the background, time, and skills to earn more (or at least much more). While I do think most people could earn more, the level of what that “more” is varies greatly from person to person.
Spending Less
- Can have a quick impact on your finances. You can cut cable, vacations, and eating out TODAY and see positive benefits immediately. There aren’t many other ways to see an instant impact to your finances.
- A greater number of people (i.e. almost everyone) can cut spending versus earn more. Some will argue that people earning below a certain income can’t cut spending. I recognize this, but a far greater percentage of people have the option to at least eliminate something than are doing so these days.
- 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, both options have their plusses and minuses. That’s one reason the debate goes round and round and never really gets resolved.
What is Most Important?
But let’s say we had to choose one as being better than the other. Which would it be?
If you say “earning more”, then someone is going to note that no matter how much you earn, you can spend it all. So earning more without controlling spending is a waste.
If you say “spending less”, then someone is going to point out that many Americans are at an income level where they can’t cut spending. Whether this is true or not for any one individual, it does make sense in theory — if you make $30k a year and live in New York City, there’s not going to be a lot of excess cash sitting around even if you’re a miser.
Which leave us at an impasse…kind of.
Let’s see if you think this bridges the two:
When starting out, earning more is more important. You probably have a low income and there’s not much room for savings. So you need to focus on growing your career and maybe developing a side hustle so your income will grow steadily.
As your income continues to grow, controlling spending becomes more important. Otherwise you run the risk of spending all those hard-earned extra dollars.
How’s that sound to you?
Both are Important
The truth is that they are both important and necessary to grow your net worth.
In fact, the phrase “spend less than you earn” makes them both important because it inter-relates the two. “Spend less” is in relation to “than you earn.”
What’s most important is what I think the heart of “spend less than you earn” is getting at — the difference between spending and earning, something I like to call “the gap.”
In short, the larger the gap, the better.
And, of course, there are two ways to make the gap larger. I bet you can guess what they are.
Yep, earning more and spending less.
To the extent that you can raise income but keep expenses level, 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 growth .
Now some “experts” say you can’t impact both — that you need to focus on one to really make an impact.
That’s hogwash. You can certainly do both. In fact, that’s what most millionaires do — they grow their incomes while controlling spending to make their gaps 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 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. If you want to focus on exact ways to cut spending, get my free e-series on the 52 Best Ways to Save Money.
- For making money, your career is where it’s at since it’s 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. I personally recommend a side hustle as well, since the numbers show what a huge difference one can make in your finances.
If you concentrate on these simple tips, you will be well ahead of most people financially and on your way to making your gap as large as possible.
From there you can pour gas on the fire to ignite your net worth, adding another way to make money here and a big money saving tip there.
So that’s my take on the spend less versus earn more debate. What are your thoughts on the subject?
Jim P. says
Growing a career involves a LOT more components and variables than “belt tightening”. However, continued frugality ultimately requires “giving up” some things and potential experiences along the way. That’s why it really is important to figure out your “why” (as corny as that sounds). That’s where I am currently…re-figuring out what I need extra money for… is it just a cushion? is it a underlying feeling of “missing out” on some future big purchase (like space travel) ….leaving some kind of legacy? It never gets easier…your priorities simply shift.
Jerry @ Peerless Money Mentor says
Hello ESI,
Great post, ESI! I am currently focusing more on the earn more side of the equation. As a person with two business degrees and an IT minor, I should be earning way more than I am currently making at my day job, which is working at a public library.
To earn more, I have turned to side hustling instead of growing my career. My two main side hustles are freelance writing and social media marketing. I make more money per hour doing these side hustles than I’ll ever make at the library – the upside potential is unlimited.
And since I work at the library, I get to study all day during my downtime. I spend my time studying copywriting, content marketing, social media management, etc. In a way, I think of it as getting paid to earn my masters degree without actually paying for the physical diploma.
Eventually, I plan on leaving the library, but for now, I’ll keep the wonderful benefits and guaranteed income.
-Jerry
Superdave says
One thing I see 1st hand, is that almost everyone you meet is broke, no matter their income. The high income folks just spend a heck of a lot more. Over time, those with great salaries do invest more in their 401k and eventually get their house paid off, plus many get stock benefits as well. So, by the time they are 62 to 65 they are in pretty good shape. But still, these are people who make $200,000+ and none of them can retire early. Most can’t even get out at 62 after decades of making four, five or even ten times what the average family earns. I work in an office of 400 and exactly one guy retired around age 50 and no one else before age 62. And only (2) got out at 62 – after making 8 million or more in salary and stock over the last 10 years of their careers. It’s crazy.
Joseph Beckenbach says
Rule-of-thumb I’ve heard in the business world is to put one-third of your effort into reducing costs, and two-thirds into raising revenues.
Most folks could really use both: the former to clarify what’s really important as part of fulfilling FI life; the latter to more quickly realize aspects of post-FI life early, before the transition occurs.
Mike Collins says
Earn more or spend less? You really need to do both if you want to build wealth. But if I had to choose only one I’d go with earn more.
Yes it requires more work but the potential is so much greater. And I don’t want to have to cut my expenses to the point where I’m depriving myself.
Ty Behnke says
I agree with this article – makes total sense to me… The section in which you stated “When starting out, earning more is more important. You probably have a low income and there’s not much room for savings.” I’d like to say from experience that it is just as important if not more important to start out with a save first mindset. Otherwise, many young people get money in their pocket that they never had and without knowing it spend it all no matter what the amount. Some think I’ve got years to start saving, so I’ll enjoy some things now. I coach people to get on the saving train from day one. If from day one you put away 20, 30 or 50% (what I suggest) you learn to live on the rest and you never miss it. I do agree we have a min cost of living to consider but if you decide to live on 50% of what you make, then you might seek out less expensive rent, a less than exciting car and less luxuries. Once you get in the habit of spending it is more difficult to stop or reel it back in. My two cents…
KR says
Yeah both are important. I started at $60k as a new hire out of college and as of today my salary is around $145. The problem was, I wasn’t really controlling spending during the majority of my time getting those raises. I was at least contributing 6-10% to my 401k so that is in good shape but I calculated my savings rate for last year and it was on track for about 15-20%. None of it was in a brokerage account, though. In the past 8 months since discovering FI, I’ve managed to reach 45-60% SR each month (higher during the summer with no daycare) and I’ve only had one raise since doing that. It really has to come from both sides. I also work on some side stuff, which equaled 10% of my salary last year and so far is about 3% (2% being passive) as I’m focusing on growing a product and taking that opportunity cost of contract gigs.
Thanks for the great post!
GT says
This is one of my favorite articles yet. I have been saying this all along and agree that people can earn more than they give themselves credit for. But look at the open negativity when a high earner posts in the Millionaire thread! Not relatable, doesn’t fit your demographic ESI, all kinds of negativity.
One can earn with the right commitment, dedication and yes a little luck. But luck comes to those who are prepared.
Higher earning does allow a nice lifestyle and achieving amazing savings results at the same time! I have been very blessed in this regard we have a great lifestyle, far from lavish we are quite modest, yet save a lot of money and plan to retire early. Leaving the high paying job behind!
I follow all three of the ESI Principles and it all still applies.
Mike W says
One more difference: getting ahead by earning more is more difficult because of the tax considerations. When you cut spending, it’s dollar for dollar savings.
MI141 says
This is a really excellent point. When you add the top marginal rate for federal and many states’ taxes, you’re looking at nearly 50%. I’m in NJ and that’s where I’m at tax-wise.
That’s not one’s overall ‘effective’ tax rate, but to your point, earning more at the top end only nets you 50 cents on the dollar. Cutting spending is dollar-for-dollar: it’s literally twice as effective in a high-earner scenario.
xrayvsn says
There is definitely a transition from when you need to earn more and when you need to spend less. By the time you have an established job, the spending less side makes more of an impact.
Every dollar you save is a true dollar gained in net worth. Every extra dollar earned does not add a true dollar to net worth as taxes take out a big bite.
Phillip says
My 2 cents … focus on the big items that have a big impact on your lifetime finances:
– Education: Pick a college major that will pay off. Pick a cost effective college. Nothing wrong with community college or trade school. This sets your lifetime earnings base.
– Living arrangement: Make sure your cost of housing is in check. Single? Consider getting a room mate. Can you re-locate to a low cost of living area? Do you really need a big house?
– Kids: When and how many? The average kid costs $250k+ through age 18. If you have kids later, you can invest your early earnings and grow your career more easily.
There rest such as transportation (OK, maybe not the car if you must have a new car every 3 years), eating out more/less, vacations, etc. are second fiddle compared to the 3 above.
PWilliam says
I generally agree. Controlling spending is very important to develop the habits of spending less than a person earns. But saving 10%, 20%, even 30% of a $50,000 or $60,000 income will take a lifetime to achieve FI. So, income growth is important to achieve savings mass. I would add that careful tax management via 401(k), Roth and HSA maximization is also key in a path to FI.
Joe says
Don’t under-estimate the affect of cost of living in different locations.
Early in my career I was able to move with the same company to a lower cost area at the same salary. This had a more favorable impact than getting a raise and staying in the high cost area.
So many multipliers of cost of living – utilities, insurance, food, gas, taxes, etc. year over year.
My son recently had similar job offers to choose from, and after running the numbers the lower salary in Texas easily won out over the higher offer in California.
I realize this is often out of your control but I would advise anyone looking to close the “gap” to consider location related costs.
Richard says
I’ve taken a slightly more grim, adversarial approach. The income level I’ve enjoyed over the last 10 years, typically 36k, is more than adequate considering mortgage and all related insurance and utility costs are slightly less than a third of net, not gross. Nevertheless, my hours have been cut back; income isn’t rising or receding, yet. Still drive my beloved old rig, a 1995 SUV, because I got it used, cash only, about 15 years ago, so have not had to make a payment since. I’ve never had a new car, or leased one, and never plan to. If I won the lottery or something I would most likely find a more proper location where driving isn’t required at all, just foot power, cab, bus, or bicycle, as needed or desired. I generally despise destination vacations and have no inclination to ‘see the world,’ as if that could help or improve anything. I know what I’m dealing with out there. Other humans are the issue, not architecture, but If I could find and afford a better place to live, I’d simply move there and deal with all their resident issues. So I do have a very affordable mortgage, manageable student loan payments, but for a degree I have not yet utilized at the tender mature age of 51–the same year I eradicated the last of my frivolous subscriptions, credit cards, and related debts. That’s good, almost sounds promising, but then my savings are about 2k, my 401(k) around 7k; I am adequately insured, medical paid in full, but then no further investments. We’ll see what tomorrow brings . . . always kind of a lower energy candidate without being lazy, stupid, or crazy about it, generally a B average student and worker, fully capable of mostly A’s. I think the only reward for extremely kicking butt while taking many names is, yeah, more money, investments, and lifestyle, but then you have to maintain it or wisely cash out early, eons ahead. Not so easy for anyone. Slave away for your employer and they will not be eternally grateful; more like, keep it up. No thanks. One of my brothers succumbed to a history of aggressive entrepreneurship this past year. Work hard, play hard, go go go, network like hell, all leading to setbacks, divorce, marginalization, leading to his premature, self-inflicted demise at age 54. I have sixteen years until retirement. I am still breathing, a reborn great saver and cost-cutter, mostly due to now enjoying it like a lifestyle choice, as opposed to all the recklessness that came before. Meanwhile, here also comes AI, the usual routine of natural disaster, unresolvable global issues, rampant greed, the spread of corruption, then a few more stray asteroids, the occasional recession. So we’ll see. Good luck out there.