Should You Try to Spend Less or Earn More?

Our Saturday Selection from Passive Income MD presents a choice: Is it better to focus more on reducing your spending or increasing your income?

low cost 401k
In some ways, I believe the answer to this question is similar to the answer to another often-asked personal finance question: Pay off Debt or Invest?

In both cases, the correct answer is Yes. Too often, people create a false dichotomy and assume the options are more or less mutually exclusive. The fact is, most high-income professionals could invest while paying off debt, and spend less while earning more.

Which should be the focus depends on your starting point. Which is causing you the most grief? Spending too much? Earning too little? Deep in debt or lacking any investments?

Nevertheless, it’s great to have a framework to help you think through these questions, and the following provides that quite well. This post originally appeared at Passive Income MD.

 

Should You Try to Spend Less or Earn More?

 

The idea of financial freedom is something everyone dreams of. Many of us are at different stages of that journey, but on some level, it’s something we all work toward.

In a previous post, I mentioned that I’m financially free from medicine, and I’m happy to say that still holds true, even a couple months later.

Not only that, but my passive income streams continue to grow without necessarily putting in more time and that’s the hallmark of truly passive income. I can’t say the same for my day job as an anesthesiologist. In fact, I’ve started reducing my time at work, not only to spend more time with my family but also some to continue to grow my passive income streams.

Along this journey, a question I’ve often heard posed is this: when trying to achieve financial freedom, or even just save some extra money, is it better to earn more or spend less? Well, of course, there are two schools of thought.

 

 

Spend Less

 

This school of thought seems to appeal to some physicians however physicians are mostly notorious for keeping up with the Joneses. Perhaps there’s an expectation of what we feel we deserve after years of sacrifice. Whatever the reason, the result is that many physicians end up living paycheck to paycheck.

Some physicians, however, are bucking that trend and living simply – even taking on yearly budgets of $62,000. Now, I’ll be honest. I live in a high cost of living area and the idea of spending $62,000 a year doesn’t seem realistic. We spend closer to $200,000. But those for whom this method works find that it works well. Most of the time.

 

set for life insurance
As with anything, there are pros and cons to simply spending less.

  • One can make changes immediately and see effects. They say every dollar you save is equivalent to $2 earned. Why? Because for most high-income earners, you have to make $2 to net just $1 after taxes. Change that $1200 car payment for one that’s $400 and you’ll see that impact starting from month 1.
  • Simplicity and minimalism. Minimalists, like Marie Kondo, have created a movement that is sweeping the nation. According to them, spending and having less allows you appreciate more in your life. This is undoubtedly true for them, and may be for you.
  • Frugal habits create discipline. The White Coat Investor has talked at length about lifestyle inflation and his remedy, “Live like a resident.” Thinking frugally helps you maintain discipline, which can spread to just about every area of your life, and may cause you to be more content with what you have.

 

Cons

 

  • There’s only so much you can cut. You can’t eliminate your basic expenses, so you have to draw the line somewhere. If that’s not enough, you’ll reach a dead end as to how much you can realistically save.
  • Frugality can lead to deprivation. You may find that life is only about denying yourself the good life, and all you focus on is what you can’t have. Where’s the enjoyment in that?

 

Apple Market London

 

Earning More

 

On the other side of the coin, we have the option of earning more. Why focus on skimping on that $4 coffee? Instead, figure out a way to make double that expense in the same amount of time.

This is an abundance rather than scarcity approach to one’s lifestyle. Budgeting is important, yes, but is life about denying yourself constantly? And does that lead to happiness and contentment?

 

Pros

 

  • Unlimited upside. As Ramit Sethi puts it, “there’s a limit to how much you can save, but there’s no limit to how much you can earn.” Your lifestyle is limited only by your drive.
  • Focuses on a life of abundance and potential rather than a mindset of scarcity and denial. Even done for all the right reasons, skipping out on things that bring you joy in order to save more money can be draining.
  • One of the secrets to happiness is feeling like you’re constantly growing.

Cons

 

  • You must step outside of your comfort zone and be bold about it. This means getting out of your normal routine in order to push yourself to learn new things. This will put yourself in a position where you could fail. However, as I mentioned before, I worry more about the cost of inaction than the cost of failure.
  • You could end up working more and having less time. The whole point of all this was for freedom–both financial and, perhaps more importantly, time. What good is more money without time?
  • Earning more to cover your lifestyle doesn’t necessarily require the same discipline that saving does. Lifestyle inflation is all too real, and you may just end up with a bigger house and nicer car, but still living paycheck to paycheck. When my wife and I were in medical school, we used to stay at motels and hostels when traveling, but now that we’ve gotten used to the life of nice hotels in nice areas, it seems a little tough to do that. This is because we’ve become accustomed to our lifestyle. Unchecked, this can turn the path to financial freedom into a treadmill that will never get us where we want to be.

 

Summary

 

Ultimately, the goal of both camps seems to be the same. At the end of the day, you want more money to spend on the things you love and to be able to work as much – or as little – as you want.

There are many websites that are dedicated solely to ways one can scrimp and save, coupon, and substitute. I see these and I realize I certainly could be saving more. But my goal is to be at a place where I don’t have to worry about that.

lucidity locumsIt doesn’t mean I’m foolish with my spending, but I don’t like the idea of debating whether I should get a coffee in the morning or not. I like coming from a place of abundance.

To be completely honest, I like to splurge on some things and skimp on others. ESI Money calls this “selective frugality,” and it’s definitely what works for me.

I enjoy my morning Starbucks. I like taking my kids to Disneyland. But I don’t want to work more at my day job to get more of these things. Instead, I’ve focused on creating passive income streams to support this lifestyle. It’s taken work to get to this point, but this was my goal all along. Now, I can have these things irrespective of whether I’m working my day job or not.

So for those who are thinking that you can just save your way to financial freedom, think again. You’re still trading your time for money. For those who strive to earn more, be careful how you go at it. Make sure you’re not continuing to just trade more time for money. You honestly may not end up in a better place than where you’re at.

Like most things in life, there has to be a balance. However, if I have to devote my energy to something though, it’s to earning more smartly and increasing what I essentially get paid per hour of work. That takes the focus off of making more (more time traded for more money) or saving more (not living how I’d like).

I see money as a means to an end, and that end is the ability to use my time how I want. Passive income provides the lifestyle I want without sacrificing time.

 

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10 comments

  • I’m a selective frugality person too. And while agree there’s limit to the amount to can theoretically earn, the other side of that is that earning more almost always takes more time. Saving more, not as much.

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  • You must figure out what enough is. Earning more than enough to make you happy is wasting your time. Earning less than enough is missing the mark and being unfulfilled. You must end the cycle of wanting “just a lttle bit more.”

    Dr. Cory S. Fawcett
    Prescription for Financial Success

  • I don’t like the idea of eating beans and rice in order to live off an early retirement where I can only afford to eat beans and rice.

    Practice selective frugality PLUS earning more in your accumulation years can lead to a very healthy and early retirement.

  • Obviously the best answer is to do a combination of both (earn more And spend less).

    However I am always going to argue on the side of spending less if I am forced tho choose.

    My rationale:
    The utility of earning more is lost thanks to our progressive tax code. If you are in the highest tax bracket earning one more dollar will mean in essence at most you can take home $0.63 (figure state and local taxes will shave that off even more).

    If you save $1, that $1 is completely yours to spend since it deals with after tax money.

    For every $1 you save, you reduce your retirement nest egg requirement by $25 using the 4% rule or even $33 if you are more conservative and shooting for a 33x annual withdrawal rate.

    Factors that force you to save allow you to get used to a certain lifestyle and it will be much easier to adapt or maintain to this lifestyle in retirement.

    Those who make a ton of money and have lifestyle creep may be in for a shock when there lifestyle can’t be supported in retirement. It is much much harder to do a downgrade in lifestyle once you are accustomed to a certain level.

    If you continue to make money but spend it all (all offense, no defense) you will never make any headway (a colander will never hold water no matter how much you put in it). Whereas increasing savings means you are automatically making progress in your net worth by that act alone.

  • Good article, Dr. POF. Obviously, the easy answer is to say “both”, but in my experience, a more helpful answer is to earn more. There is a limit to cutting spending, and once you trim the so-called fat from your spending, it starts to get really painful to cut any more. It is no fun to be early retired and then watch the pennies every day. The best advice for all FIRE aspirants in my view is to put 80-90% of your efforts in early career towards earning more (with emphasis on saving at least 50% of income, which puts a natural ceiling on spending), and then once a sizable nest egg is built, then focus on fine-tuning the spending budget.

  • Ginzu

    Math, absolute and final. The telling, and never elusive, Income minus Expense, tracked per hour. It is an in your face, discernible and understood discreet number, per unit of time. For me, the result answers what my time is worth in a monetary rubric.
    The rest of the answer for me lies in the definition Enough. A work in progress. Monetarily, Enough is easily quantified. An renewed appreciation of the blessing, “May you have enough…”, four simple words, I thank you for reminding me of with this article.

  • Gary Simms

    Daving is easier than earning because it requires no work, only sacrifice.

    The less you need to live, the quicker you’ll achieve FI.

    In the end, it’s the bath tub analogy. Plug the drain as much as you can and open the spigot as much as you can to fill the tub to the level of FI.

  • Gasem

    Does it really matter? You buy some crappy plastic egg beater and save 20 cents. 2 days later it breaks. Frugal schmugal. You get a wild hair and buy BITCOIN and the market dumps in half, so much for PASSIVE INCOME. Either way you’re a dope. Either way you failed to understand your risk, you lost half your money and you still don’t have a working egg beater. You listen to Dave Ramsey and get all hep’d to GET OUT OF DEBT and fail to realize if you had put half of that get out of debt money into low cost mutual funds, you could own a piece of America for decades. Sure it would take you twice as long to get out of debt, SO WHAT? 3 yrs v 6 yrs debt service (an example) when your talking 50 years of possible stock ownership and appreciation? You too can be a Dave Ramsey dope, just buy the soap he is sells. But ooooh it feels soooo gooood to be out of debt right? That feeling may cost you a million in lost opportunity.

    Inherent in “achieving FI” is one thing and it’s not how much money you have, it’s how much risk you’re willing to live with. Can you live with a portfolio or retirement scheme that has a 10% failure rate? 5%? 20%? What sequence of return can you stand? What tax abuse can you stand? These are the actual control variables. FI is not about accumulation, it’s about funding distribution. You may have some “passive income” you rely on, what’s the risk in that? What’s the chance that goes under and what’s that going to do to your ability to survive? A statistic: 30% of all businesses fail AFTER ten years of business. That is to say after 3652 days of being in business you still have a 1 out of 3 chance of failure. Scratch your chin on that one. I’ve had a few wins and a few losses in my speculative life, and I’ve had a lot of fun in speculation and gained a lot of knowledge but I never bet the ranch on that. Sometimes it takes a decade for you to realize your bright idea compounded into a loser or at best a wash.

  • Thank you for this post. I like the expression “selective frugality” because it illustrates the goal of cutting expenses you don’t need need/want while allowing for excess in other areas.

    Personally, I have really enjoyed getting some distance from consumer culture and cultivating a sense of gratitude. Now I can keep adding things back in that give me joy. Minimalism has helped me prioritize, get out of debt, and save.

    That said, pinching pennies and clipping coupons is not going to save young doctors from massive student debt. You have to negotiate well and put in the time earning income to achieve FI. If you live like a student/resident for a few years on an attending salary, you can achieve so much.

  • The trick is to spend on what brings value to your life after taking into account the hours you must work to get it. Take your gross income for a day and subtract out taxes and commuting costs ($0.50 per mile) and then divide it by the time you were working plus commuting. That number is your spendable wage. Let’s say it is $50 an hour. Is that Starbucks worth working 6 more minutes that day? Yes? buy it… No? don’t buy it… Simple.

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