Searching for ways to achieve your financial goal, we often look at two major options: spending less and earning more. But which is best? Cutting expenses vs earning more money: who wins the prize? Obviously, both create a way to save more money. By spending less and cutting your costs you can keep more money in your bank account. By earning more money you can increase your income. This will probably result in saving more money as long as you don’t start spending more.
We are taught to earn more
It may feel like cutting expenses and earning more money are two equal options in pursuit of your big hairy audacious goal. But actually, when you think of the way we are raised in life, the main focus is definitely on earning money. Go to school, study hard, make a career, and get promoted… All these steps are part of the same strategy. The strategy is to make a living by having a good salary. The assumption is simple. If you do your best in school, you will be able to get a good job and if you do your best at your job, you will be able to provide for yourself and your family.
“In our society, financial success is associated with having a well-paid job and earning a lot of money”
In contrast, there is a lot less focus on spending less money as a financial strategy. Yes, there are TV-shows like Extreme Cheapskates and Extreme Couponing in which we see people franticly trying to save money. But those TV-shows have more of an entertainment value. The way of life that is portrayed is not considered a good way of actually creating a financially better life. It seems that cutting expenses is associated with living on scraps. Depriving yourself of the good life and actually not enjoying your life to the fullest…
So, who wins in the cutting expenses vs earning more money race?
Two sides of the same coin
It may be clear that we do not value the possibility of cutting expenses as much as we should. We tend to focus more on creating opportunities for earning income. But we definitely should not eliminate strategies in cutting our expenses. It would be an important step forward if we would value both options as equal strategies in saving more money.
Achieving a financial successful life doesn’t only require a good income. It also requires knowledge of how to spend less, be smart with expenses and cut costs where possible. This means we need to re-examine the focus we put on getting a good income and balance it with more focus on skills of being more frugal. Why is personal finance not a required subject in school? Why are we not taught that there a two ways to create a good life? We are setting ourselves up for a long life on trying to earn as much money as possible, while we lose all of it via the ‘backdoor’ since we are not skilled in spending less money.
Why cutting expenses actually is better than earning more
To take it even a step further, we actually would need to shift our thinking 180 degrees and start focusing MORE on cutting expenses and LESS on earning a good income. This may sound crazy, and it is definitely not the standard way of thinking about your personal finances. But if you think deeper about it, it actually makes a lot of sense. For us, it was one of our main insights and a life-changing moment when we discovered that the power of spending less is so much greater than the power of earning more.
“Each dollar that you don’t spend is two dollars you don’t have to earn”
The fact that spending less puts more weight on the scale money-wise is an important fact that is often unknown or overlooked. It is way better to spend less than to earn more. If given the choice, you are better off with cutting your expenses than you are getting a raise. The reason behind this is quite simple: each dollar that you don’t spend is two dollars that you don’t have to earn!
The problem with taxes
The truth of this lies in taxes: the government taxes your income and this makes earning money less powerful than you might think at first glance. The money you spend is always coming from your after-taxes (net) income. This is why a 100 Dollar monthly raise in your salary may sound great at first, but it can be a disappointment when you see how little this salary increase improves your financial situation. The contrary is also true: when you can save 50 dollars in monthly costs you have given yourself a 100 Dollar raise without having to work harder! If you are looking for ways to cut your expenses it might be nice to read how we live on a weekly budget and how we have set-up our bank accounts.
Starting to focus on spending less and cutting expenses may be a better and far easier option than focusing on getting a higher income. Another option is to spend less net money (after taxes) and create more opportunities to spend your gross money (before taxes). Starting your own business or creating assets can give you great opportunities for that.
What do you think of cutting expenses vs earning more money? What’s more interesting for you?
FIRE and Cutting expenses vs earning more money?
Interestingly enough, there is now a movement of (mainly) Millennials that is starting to shift its focus from earning more towards spending less. They actively hack the way they think about personal finance. The FIRE movement (Financial Independence, Retire Early) is rapidly growing and getting more followers. We think it is a refreshingly new and controversial way of achieving your financial freedom, which is definitely worth discovering more about.
Interesting read: 11 Expenses to cut if you want to retire early