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Should I Try to Earn More Or Spend Less?

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Earning more and spending less is key to financial success

Earning more and spending less are not mutually exclusive, they go hand-in-hand.

The reality is you need ‘great offense and great defense’, as discussed in the acclaimed book The Millionaire Next Door. If you’re goal is to be wealthy, you need to be aggressive in accumulating more wealth and staunchly defend that wealth.

Example: How would an extra $1000 a month affect you?

dollar bills spread out on table

Let’s look at two common groups of people: Coupon cutters and big spenders. Both groups earn vastly different amounts of money, but at the end of the month may have an empty bank account. One group has great offense and the other, great defense.

Depending on whether you are a coupon cutter or a big spender, you might spend react differently to earning an extra $1000 a month.

The coupon cutter spends all their time finding coupons and money saving tips, but doesn’t invest in themselves and their career. They might use the $1000 to pay off some debts and save for the future (bad offense/good defense).

The big spender earns a lot through their stressful, high paying job and wants to reward themselves. They might take on MORE debt through a new sports car on finance and be in the same position financially (good offense/bad defense).

Both these groups need to work on having both good offense (earning more) and good defense (saving more) if they want to be financially successful.

Don’t be an Under Accumulator of Wealth

The Millionaire next door promotes the idea that generally, people fall in to two camps:

  1. Under Accumulator of Wealth (UAW) – those with a low net worth relevant to their salary. People that do not save enough.
  2. Prodigious Accumulator of Wealth (PAW) those with a high net worth relevant to their salary. People who save a significant portion of their income.

Regardless of your salary, you can be (and should strive to be) a PAW. That means saving at very minimum 10% of your salary – and investing it wisely!

The habits of millionaires – PAW’s who make smart financial decisions

Whether or not you aspire to be a millionaire, the habits of prodigious accumulators of wealth are life lessons you should consider. They tend to share outlooks on various financial decisions:

  • Spend less that you earn.
  • New cars are terrible financial investments. Most PAW’s buy used, reliable cars in cash.
  • PAW’s spend more time learning about wise investments that they do researching new cars!
  • Avoid ‘keeping up with the Joneses’. You don’t need that shiny new thing your neighbor bought:

We buy things we don’t need with money we don’t have to impress people we don’t like. – Various sources

Avoiding lifestyle creep and the hedonic treadmill

The default reaction might be to want to earn more, rather than spend less. You can maintain (or increase) your current lifestyle by simply earning more, right?

But each time your salary goes up, it’s tempting to spend that extra money each month on a new car payment or better groceries or a weekly cleaner. That will leave you in the same position financially as before the salary increase. It’s known as lifestyle creep, and it should be avoided.

until debt tear us apart graffiti on brick wall

Instead, when you start earning more use it as an opportunity to save & invest more at the same time. When my salary has improved in the past, I’ve made a conscious effort to reduce spend somewhere in my life. The temptation of lifestyle creep will always be there. Consciously reducing spend somewhere despite having more money is a way to stay disciplined and committed to your current budget.

If not, you will find yourself on the hedonic treadmill. The need to increase your income and improve your lifestyle will never be quenched. There will never be any permanent gain in happiness. By saving instead of spending, you can avoid this depressing phenomenon and build personal wealth at the same time.

Should I try to earn more?

There is no magic number to aim for when it comes to salary, but people have tried.

A famous study at Princeton that looks at whether money buys happiness (2010) found that the ‘sweet spot’ (in today’s money would be about $90,000 (£65,000) a year, before you receive diminishing returns from any salary increase. Your happiness may still go up when your earn more than this figure, but the amount by which happiness increases is less.

all you need it less in scrabble letters

Instead, you might want to focus on spending less. It’s a lot harder to scale back on spend once you get used to a high spending lifestyle, so try to avoid lifestyle creep in the first place.

What you decide to focus on might depend on your age.

Earning more money when you’re young vs old

When you’re young, its likely you have a smaller salary. Therefore, you should be focusing on your career and how to earn more. Developing basic budgeting skills that will keep your finances healthy is important. But focusing on your personal development is what will give you long term financial success. Invest in yourself when you’re young, through education & diversifying your skills for example.

When you’re older, it’s likely you will have a larger salary, but not always. Either way, your financial goals are going to be shorter term. You might be peaking in your career and your earning potential may plateau. Any increases in salary might come with large changes in responsibility and increased stress.

Career driven individuals can often find themselves in highly paid and highly stressful jobs. Giving up the large salary is difficult.

Ask yourself – what do you have to prove? Do you need that validation of becoming a VP or CEO knowing the potential of additional stress and impact on your work life balance? Will it help you achieve self-actualization and fulfilment in life?

Sometimes your health may make the decision for you – be it mental or physical health. As you get older your physical health starts to fail you, and the stress of high paying jobs can harm you mentally. In this situation, striving to earn more might not be your goal, instead reducing your outgoings and saving more for the retirement years ahead might be optimal.

Conclusion – should I earn more or spend less?

Ultimately, it comes down to how much you currently earn, and how much you currently spend.

Start by making a budget, with your income and all your outgoings for the month. If your income is less than your outgoings, you need to try and save more.

If your income is high, but your expenditure is high as a percentage of your income, focus on trying to save more.

If your income is low, and your expenditure is low, focus on trying to earn more whilst maintaining the current lifestyle you have.

To be financially successful and wealthy, having great offense (earning more) and great defense (saving and investing more) simultaneously is the key.

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