Why Spending Less Matters More than Earning More
This post will probably feel a little counterintuitive given the fact that I constantly promote earning as much as humanly possible, so let’s get one thing absolutely clear upfront:
Earning more will skyrocket your investing journey to eventual freedom, but it doesn’t matter if you don’t know how to spend less.
I won’t waste time explaining the painfully obvious (“If you spend every dollar you’re making, it doesn’t matter how much you’re making,” #duh), but I do want to dig into why a dollar saved is worth more than a dollar earned.
How often do we scheme for new ways to make money? We fight for raises, politick around the office for promotions, and (if you’re like me) are constantly scanning for new and inventive ways to make money that are (mostly) legal and don’t require a ton of extra effort.
But if you’re on this #financialfreedom journey with me, there’s a part of this puzzle that makes way more sense to focus on in the beginning:
Spending less.
Spending less matters more than earning more. Without question.
Why?
Because a dollar of new earned income is taxed, and a dollar you already have in your pocket isn’t.
Huh?
Think about it this way: In order to have one dollar in your pocket, you actually had to earn closer to $1.30: Between federal income tax, state income tax, and Medicare/social security, you’re probably paying about 30 cents of every dollar you earn to your friends at 1600 Pennsylvania Avenue.
So once you actually have a dollar, the equation looks like this:
$1 of money in your pocket requires working for $1.30 to replace it.
I’m no currency exchange expert, but that fact – that you have to earn $1.30 to actually pocket a dollar – means that dollar in your possession is inherently more valuable than $1 of earnings.
If you’re like, 30 cents? Big whoop – what’s this crazy internet girl even talking about?
Consider this:
Most of us would get excited about a 10% raise. If you make $50,000 and you get a 10% raise, your new income is $55,000 – yeehaw, cowgirl!
So you might look at that and think, “Sweet, five-thousand bucks!”
But how much of that will you actually see, on a monthly basis?
$5,000 / 12 months = $416 per month before tax, or approximately $291 after taxes (if you assume averages for state, federal, and other taxes).
Isn’t it weird to think that a 10%, $5,000 raise equates to just $291 more per month? That’s less than $150 extra per paycheck.
To actually take home an extra $5,000 per year, you’d need to get a raise worth $7,150.
When you think about it that way, it means that saving $5,000 of your income per year is equivalent to giving yourself a $7,150 raise.
I know this feels like fancy bullshit accounting, but it’s true: The good news is that often times saving extra money is actually easier than clawing your way up a corporate ladder to earn more. We won’t even meander into the land of lifestyle creep today (wherein you slowly begin spending more as you make more, therefore eliminating any margin or gap between expenses and income despite the fact your income is growing), but the classic Corporate America trap is being placated every few years by a few percentage points tacked onto your salary without realizing you aren’t really getting ahead.
I’m not saying getting raises is a bad thing – just that if you’re spending as if you’re about to be on season 26 of the Bachelor and need a new outfit for every group date, even a $5,000 raise won’t help.
Do you think it’d be easier to shave $416 per month off your expenses, or negotiate a $7,150 raise?
They have the exact same impact on your bottom line.
Trying to earn more without getting control of your spending is like fighting to put more water in a bucket that has holes in the bottom.
Until you patch up the holes (read: the spending leaks), it doesn’t matter how hard you work to fill that bucket with water – it’s utterly futile. Your effort is wasted. Your time is wasted.
Unchecked, unintentional spending can suck the wind out of the sails of even the fanciest, six-figure earning sailboats (it’s a metaphor: You’re the sailboat). And since it’s entirely in your control (unlike your income and when the Corporate Gods decide to rain cash bonuses down upon you), why not focus your efforts on spending reasonably first?
That’s not to say you can’t buy the things you love and care about. But if your current spending habits involve blindfolding yourself and stumbling through Anthropologie, credit card in outstretched hand, there’s probably some fluff you can trim with ease.
The other day someone DM’ed me an article from CNBC’s Make It about a 29-year-old woman who earns $158,000 from one full-time job and two side hustles. At first, I was like, hell yes, sister! Stack those income sources!
…then I watched the video.
They had her break down her spending and saving every month, and this woman – who takes home $110,000 per year after taxes, or $9,166 per month (roughly), was saving $1,000 per month. $1,000!
She was somehow managing to spend $98,000 per year, or $8,000 per month, as a single person living in a low cost of living area – and CNBC was celebrating her as a Millennial success story.
I slammed my laptop shut in a fit of rage. To me, there’s nothing more impressive about that scenario than about a woman making $48,000 per year (call it $35,000 after taxes) who’s able to comfortably live on $23,000 and save $12,000.
This means that, year over year, the person who makes $158,000 and the person who makes $48,000 are growing their net worths at the exact same rate (but one of them is working three jobs, and the other is only working one).
So often I talk to people who get caught up in the nitty-gritty details of investing without first examining the basics of their spending.
…and it’s a little bit like getting wrapped up in the details of how to paint your nails effectively without worrying that you have a broken hand.
The nails don’t matter if your hand is broken! You have to tend to the big shit first. No amount of nail polish (or fancy investing) will help make up for a broken hand (read: reckless spending).
What makes the big difference, over time, is consistently spending a lot less than you’re earning, and investing the difference.
It’ll feel weird and abnormal as you look around and see almost everyone else you know living barely below (or maybe above) their means, but you’re not here because you’re striving for normal. You’re here because you’re striving for freedom.
To that end, it almost doesn’t matter what you’re investing in or how – just that you’re saving a substantial portion of your income. After all, even if you literally just saved half your income (and didn’t invest it), you’d eventually reach financial independence – no investing required. But if you’re saving only a small fraction, it doesn’t matter how perfectly your investments are set up – you simply have too many holes in your bucket to retain much water.
All of this matters: Earning more, learning how to invest, and spending less. But worrying about earning more or learning how to invest before you master spending less is useless.
If you’re like, “Great, cool, love it – but how the f*** do I spend less?”
I’ve got a whole slew of articles locked and loaded. A veritable budget charcuterie board of options: