Earn More vs. Spend Less Throwdown
What’s more important: increasing income or decreasing spending? The debate rages on, but unfortunately many answers miss the crux of the matter.
After a year and half of talking a lot of thrift, we recently broached the income side. To be honest, much of our financial progress has been supported by an above-average income. Yet we’re a one-income family living on less than half our take-home pay. We spend less than average and that makes an impact, too.
Many argue that you can increase your income by greater magnitudes than you can slash spending. But people often find their budget feeling tight even after their income grows. If you spend more than you make, it doesn’t matter how much you make. You never get ahead.
So what’s more important—your income side or your spending? Whichever one you need to work on. It depends on the person. I can’t tell you which that is for you, but I hope the case studies and questions below will help.
Consider two case studies of real-life families:
Family 1 was often running low on money despite having a very good income. They cited their house, having a baby, and medical expenses as some of the reasons for having cash flow problems. They were right that their spending was the problem, but were citing reasonable expenses instead of looking to the ones they could decrease.
Over time, resources from Dave Ramsey helped motivate them to reassess. They were eating out multiple times each week. They were paying for gym memberships they didn’t use. They were buying convenience items. One partner was smoking. They had a car payment and student loans. Once they started cutting back in these areas, they were able to pay off their car and student loans early. They built enough equity to stop paying PMI. The smoker quit. They started cooking at home. They identified that the problem was spending, acted accordingly, and have continued to make huge strides toward financial flexibility.
Family 2 was often close to broke, but one spouse’s father would cover what they couldn’t on a monthly basis. He even gifted them a down payment on a house. The only problem was that they couldn’t really afford the monthly mortgage payments. When they had their first child, the wife left her job to stay home. The husband worked in a field with limited earning potential. They still had student loans from his associate’s degree.
While their bills were paid, they had a serious income problem: part of their income was coming in the form of regular gifts. While this was very generous, it was ultimately unhelpful. It didn’t allow the family to attack their finances from the income side, which desperately needed attention. Both partners were capable of earning more but weren’t sure how to make it happen.
See how landing on just income or just spending doesn’t solve the problem for all situations?
Do You Need to Hustle?
If you’re underearning, dissatisfied with your job, or aren’t making enough to get by, you need to work more, harder, and/or smarter. You absolutely need to attack the income side so you can gain flexibility and not have money be the limiting factor in every life decision. You need a raise, a career move, a second job or other side hustle. Here’s how we stopped underearning by overstaying at the same company.
Know when it’s time to move on. Research your value in the market. Negotiate a raise if you’re underpaid. Assess what you’d be willing to do to make more money: would you work overtime, change companies, relocate, change careers, or start a side hustle or small business?
At some point, working more, harder, or sometimes even smarter becomes undesirable as it detracts your time and physical and mental energy from what you’d rather be doing. A common belief states if you could possibly make more money, you should. I disagree. There’s a lot more to life than pushing your earning potential to its outer limits, at any cost to other areas of your life. Always keep your real worth in the balance with your net worth.
Do You Need to Cut Back?
Do you have a good income and still find yourself broke? Do your expenses rise steadily alongside your income? Do you know how much you spend on average in a month? Are impulse purchases, going out, or recreational shopping frequent for you? Look to your spending for solutions.
I sense that people from relatively affluent homes are more likely to need to work on this side. People with the advantages of the middle and upper-middle class are more likely to earn good incomes. They’re also more likely to be acclimated to a “comfortable” lifestyle that may have taken decades for their parents to build, but they aim for as soon as they land their first job.
Whatever your background, don’t dismiss the expense side of the equation until you have a handle on how much you spend, and on what. It’s easy to say, if I only made as much as her, or if we could just catch a break from special expenses cropping up, then we could get ahead. But if you’re making decent money and not saving it or paying down debt, more money isn’t going to fix the problem.
In summary, my answer to the income vs. expenses debate is that you need to work on the area where you’re weaker until you gain traction. In some cases, you’ll need to work on both. But you simply can’t assess which one it is for you unless you have a good picture of your financial situation. We approach this by tracking our spending and creating an annual budget.
Review the last few months of your income and spending to catch a snapshot of both angles. If you cut, cut, cut, and there’s still not enough income, increase the input. If you earn, earn, earn and never find it to be enough, it’s time to decrease the output. Underearning and overspending are both a waste of precious resources.
A healthy financial situation looks like being happy with both your income and spending, while staying open to improving both sides. Once you reach this point you’re free to focus more on the angle that’s your strength.
What are your financial strengths? How have you improved your weaknesses? Any other takes on the income vs. expense debate?