Saving Money vs. Making Money

I'm sometimes asked, “Which do you think is more important: saving money or making money?” They're both important, equal factors in the wealth equation:

[WEALTH] = [WHAT YOU EARN] – [WHAT YOU SPEND]

Which is most important to you depends on your current financial situation.

If you have a good income, then the most important thing you can do is to control spending. If your family earns $100,000 a year and is unable to make ends meet, or is subsidizing an affluent lifestyle with credit, then it's more important to scrutinize your spending habits than it is to make more money. Try the following:

  • Track every penny that you earn and spend. This is an excellent way to change your behavior. The act of tracking your spending makes you more aware of your money habits. The key is to track everything, even the $2 you spend on coffee every morning. You want to develop money sense, an awareness of where all of your money is going.
  • Reduce expenses. Find areas where you're spending out of habit, and reduce these costs. For example, in 2004 I spent $200/month on books. Even I could see that this was foolish. I made a goal to cut my book spending in half for 2005. By using the library, I met this goal. My goal for this year has been to cut my book spending in half again, to $50/month. Because I've decreased my spending on books, I have money available for more important things, such retirement savings.
  • Consider a budget. Budgets are not for everyone. (I do not keep a budget.) But for some people, they're magical. They impose an order that helps to clarify their financial goals. If you know that external structure helps you, then examine your spending records to create a budget. (Check out the budgeting category for some ideas on how to make a budget that works.)

If, on the other hand, you don't make much money, then the best thing you can do is to increase your earning power. If you've already reduced spending to the bone, then you must increase your income. Minimum wage sucks — no question — but there's no reason you have to settle for a lifetime of low pay. The younger you are, the more chances you have to improve your situation.

  • Get a second job. What's worse than working one job? Working two jobs. But sometimes that's the best option. Many of us have worked multiple jobs in order to earn enough to get by, or to save to improve our situation. You can too. But recognize that this is a short-term solution. Your goal should be to shirk the shackles of debt, or to escape minimum wage, so that two jobs are not necessary.
  • Get a promotion. One way to break free is to move up in your current company. Hard work and a positive attitude pay dividends, and usually sooner rather than later. I have never seen an instance in which hard work and a good attitude have gone unrewarded, either through increased pay or a better position. Persevere.
  • Get an education. Do not underestimate the value of education. This is the most important step you can take to increase your earning power. If you're still in school, make the most of it. If you're older, take classes in a field that interests you. After nine months of computer classes on evenings and weekends, I was able to land a programming job that paid $25/hour.

If, like most people, your family is middle-class, then it's important to work on both earning and spending. Live a frugal lifestyle, but also take steps to improve your earning power. If you can cut spending while increasing income, you'll be startled by the change in your financial situation. And remember: frugal tendencies help everyone — both those with high incomes and those with low incomes.

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prlinkbiz
prlinkbiz
14 years ago

There are many ways to increase you financial means. It is actually easier to become financially free the less you earn/need to live on. For example, I can live on $2500 a month. So instead of finding a minimum wage job that would take me away from my kids, I saved money and invested in a biz that throws off $2500 cash flow for me. I also started my own biz, and any additional money that makes, I put towards investments. Many benefits to starting your own biz, tax, time, financial and otherwise, even as a side or part time… Read more »

dabrfe
dabrfe
14 years ago

Dollar for dollar, it is better to save $1 than earn $1 – the saved $1 isn’t taxed. So, I would rather reduce my expenses by $50/month than get a $50/month raise.

Looked another way, every $1 spent requires earning at least $1.33 (assuming 25% gone to taxes, FICA, etc.).

prlinkbiz
prlinkbiz
14 years ago

Money you save loses money over time. Why not manage the little bit of risk and leanr to grow it? The world is one of abundance, not scarcity- live life!

dabrfe
dabrfe
14 years ago

Saving money does not mean stuffing it under a mattress. Saving money encompasses any number of investment vehicles that can easily preserve principal in the face of inflation. Some would argue that the world (certainly America) is one of indulgence, not abundance. Just because a large population lives that way, does not mean it is the healthy way to live. Scarcity is not the only alternative to abundance. I agree that we were made to enjoy life. However, happiness should not be dependent on material abundance. There is much happiness to be found and much life to be lived in… Read more »

Fazal Majid
Fazal Majid
14 years ago

Actually, it’s Delta_wealth (or debt) = income – expenses.

That said, saving money by spending less packs a triple whammy: the savings come from after tax money, and at the same time reduce the amount of money you need to earn or save to be wealthy, i.e. financially independent.

If your marginal tax rate is 10%, saving 5% off your expenses is equivalent to earning 21% more (assuming your savings are proportional to income), or to a 15% raise (if you put away all of the raise for savings).

Carolina
Carolina
12 years ago

Great site!

DABRFE–Sometimes I’d rather stuff the money under my mattress:)

David
David
10 years ago

Getting a roommate is a great way to save money. My mortgage is $600 a month. But I only pay $300 and he pays me other half. Only 2 pple live in my small house me n him.

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