It’s long been a question posed in personal finance circles, with plenty of disagreement. What’s more important: growing your income, or saving more money? Earning more or saving more?
Some experts will vehemently state that you must focus on earning more, because that’s limitless. Frugality will only get you so far. They’re right.
Others will argue that saving more money is key because plenty of high-income-earners are still living paycheck to paycheck. You need to get into a savings mentality so that when you do eventually grow your income, you don’t instantly blow it on lifestyle inflation. They’re right, too.
Therefore, I’m going to give the slightly annoying response: the best option is really to do both. Earn more and save more. Both parts of the equation are essential and they work together to create the best financial future for you.
Why Earning More Is Key
Increasing your income is such a vital aspect of financial health. Obviously, you need to make money in order to pay the bills and save for retirement.
If you’re a fresh college graduate in an entry-level job, you probably dream of earning more money someday. It can be really tough to make ends meet, especially with student loan payments and a sad job market. For many young people, even the thought of saving money seems like an impossible dream.
In that case, saving on your everyday expenses can be a lifesaver. However, you still need to focus on the income side of the equation. You can’t save what you don’t have. If every penny you make is sucked up by bills, you’re more vulnerable to emergency expenses. You’ll struggle to ever get ahead.
Earning more or saving more? In theory, earning more is the more effective of the two because your income is potentially limitless. Income doesn’t really have a ceiling, as long as an individual is willing to learn and grow and work hard.
Consider the differences between someone earning $50,000 and someone earning $100,000. It’s pretty obvious that the $100K earner should be able to save more. Even though the two people’s expenses could be vastly different, the $100K earner simply has more money to work with. If their expenses were identical, the higher earner could save more easily.
Another way to look at it: how much can you cut expenses through frugality? Many of us can drop our monthly expenses quite a bit. Cutting cable, eating out less, buying used versus new—they’re all good strategies. But for someone only making $25,000 a year, ruthless frugality can only do so much. The way to make a real and significant change in their future is by earning more. Saving more just won’t be enough.
Here’s another thought: the more you earn, the less you need to save, at least on your expenses. You still need to save up an emergency fund and invest in retirement accounts. But for your day-to-day existence, you can relax a little once you’re earning more money.
How to Earn More Money
Since earning more money is so essential to changing your financial future, here are several strategies to try.
- Increase your income by taking on extra hours at work. You might ask for overtime and extra shifts to make more money. It’s the basic “work more, earn more” equation. Maybe it’ll be temporary, but maybe not.
- For more of a long-term change, talk to higher-ups about potential for a promotion, and figure out how to qualify for one. If there’s a higher level of management in your company, for example, that would almost certainly merit a significant pay raise. (Or just ask for a raise anyway. Many of us forget that can be an option!)
- You can raise your income and increase your financial freedom by starting up a small business or side hustle. This may or may not be related to your full-time job. However temporary a side hustle may be, it can make a real difference in your finances.
- Train for a new, better-paying career. Of course, this requires time and probably some money, but might be worth that investment. Be sure the return on investment (ROI) makes sense, though. Don’t go into six-figure debt for a slight potential salary increase.
Where Earning More Falls Short
Now, I’m inclined to say that the income side of the equation matters slightly more than the savings side. But not by much. It’s really not a one-or-the-other proposition.
I mean, you could infinitely keep increasing your income (though that’s pretty unlikely). For some people, it just isn’t feasible to continue adding more hours to your workload. There may not be much potential for career advancement in your field.
Here’s where focusing solely on earning more can be detrimental: it doesn’t automatically change your mindset. What I mean is that some people instantly increase their spending the minute their income increases. They spend their raises before they even earn them.
We all know plenty of people who succumbed to lifestyle inflation. As soon as they got that raise or secured that promotion, they felt the urge to spend more. Maybe they felt suddenly embarrassed by their 12-year-old vehicle, so they splurged on a new one. “Why not? I deserve it,” they said.
While people should feel free to enjoy the fruits of their labors, spending more money doesn’t always make you happier. The danger of making more money is if you don’t have a plan, your money tends to disappear.
We need to watch out for hedonic adaptation when we start earning more money. Hedonic adaptation refers to the way humans respond to change in our lives. Whether it’s a good or a bad change, we very quickly return to the same level of happiness we had before the change.
So imagine you get a $10,000 raise at work. You’re probably excited about that extra $10K a year. But after a few weeks or months, you probably are back to your previous level of contentment. The higher income doesn’t fix all your problems. And if you’ve already spent that raise, you’ll need even more money, perpetually, to fill your growing desires.
Earning more definitely has benefits, of course. If you’re paying off debt or saving for retirement, a higher salary certainly makes it easier. But if you don’t make a plan for your higher income ahead of time, you might lose out on the benefits. Decide how you’ll allocate some of your newfound income for greater savings, and you’ll be much better off.
Why Saving More Is Key
The ability to save money is a powerful thing. No matter how much money you make, you can better your financial circumstances by spending less than you make. That’s why income alone can’t protect anyone: some of us don’t have the self-control or wisdom to save.
At every stage and income level of your career, saving a percentage of what you earn is essential. That’s why so many people earning six figures are still living paycheck-to-paycheck. If you don’t rein in your spending, you’ll have to keep working indefinitely.
Learning how to be an amazing saver is important at any income level. If you’re able to save a high percentage of your income for even a few years, you might open up new opportunities. Perhaps you dream of starting your own business, or taking a year sabbatical to travel. Or if early retirement is your goal, being a savvy saver/investor will definitely be important.
So while there are limits to how much you can save, it’s crucial to build up your savings muscle. Get in the habit of saving whatever you can, even if your income is very low. Then, stick to the same savings rate (or increase it) as your income increases. That will prevent excessive lifestyle inflation and enable you to prepare for your future.
How to Save More Money
There are thousands of articles out there on tips and strategies for saving more. I won’t attempt to get into all of them here, but just share a few tried-and-true savings tips.
- Avoid taking on unnecessary debt. If you don’t have a clear reason for borrowing money, it’s only going to trap you for years to come.
- Pay with cash instead of credit cards. Some insist the emotional toll of paying in cash causes you to spend less. Even if that’s not true for you, you should avoid buying things you simply can’t afford. Don’t treat credit cards like free money, since it’s not.
- Choose where you live wisely. Simply living in a low cost-of-living area could make a major difference in your expenses.
- Don’t buy more house than you can afford. Keep your housing costs down, since a home is one of the biggest purchases you’ll make in your lifetime. (Sharing housing costs with roommates is another strategy for this.)
- Buy used cars rather than new. Depreciation the instant you drive off the dealer lot is ridiculous. So even buying two-year-old vehicles instead of new saves thousands of dollars.
- Don’t spend money on things that don’t really matter to you. Be mindful and examine your spending, and figure out what you don’t need or want.
Where Saving Money (On Its Own) Falls Short
Obviously, I’ve already mentioned that saving money has its limitations. You can’t save money you don’t have. So keep working on the income side, but maintain the habit of saving wherever possible.
If you’re barely making enough money to fulfill all your obligations each month, saving money may be impossible. For someone who has cut back to a bare-bones budget and still has nothing left to save, savings advice is going to sound pointless. In that case, it’s really vital to put more of your focus on making more money.
Striking a Balance: Earning More or Saving More
Most of us understand that in a perfect world, we need to focus on both earning and saving. Making more money means you have more money available to save. Saving money means you’re less susceptible to lifestyle inflation and more prepared for emergencies. Both are necessary for optimum financial success.
I find that Paula Pant of Afford Anything has a fantastic way of summing up this issue. She says that when we try to say that either earning more or saving more is most important, we’re asking the wrong question.
Paula Pant’s solution: “Grow the gap.” She explains that by themselves, income and saving don’t really mean much. What matters is increasing the difference between how much you earn and how much you spend. The two things you need to do are:
- Earn More
- Spend Less
When you earn more money and keep your spending low, you grow the gap. You increase the amount of money you have at your disposal. The bigger that gap becomes, the greater your power to reach your financial goals.