Today, I want to target one of the oldest and most discussed topics when it comes to personal finance. What’s more important? Saving or earning money?
Sure, they are not totally unrelated and you can’t really save money if you don’t earn anything. However, with a steady income, this question evolves.
Some guys focus on saving more and more money and retire as soon as possible and live a minimalistic life for the rest of their days. The ultra frugal lifestyle has its benefits and works great for a few.
Others want to earn more and more money by climbing the corporate ladder or building a million dollar business. There are also just a few who succeed on that path but they are mostly financially ahead of the frugal guys.
So, which path should you take? Should you become a coupon evangelist who scans the newspapers to collect these coupons and save heavily on groceries? Or should you strive for a career full of work and luxuries that others just dream of?
Today, my friends, I will provide you with an answer. Without further ado, let’s dive in.
Note: This post is opinion based. I know some guys are very lucky by going hard on frugality and think this won’t hold them back in any manner. Others earn that much money through their careers and don’t have to care about budgeting at all. This post just shows my opinion on the whole thing.
The answer is: …it depends
Okay, this is probably not the answer you were looking for. But bear with me, I will go deeper into it and give you some hands-on guide when you should focus on each of those paths.
So here are some things that you need to consider:
- What is your financial situation right now?
- What are the goals for your life?
- How much work do you want to put in?
- Which path is more fulfilling for you?
- Do you want to have the best of both sides?
So let’s look at both options and my opinion on both of those, one by one.
When saving more money is more important
There are many reasons why saving money is more important. Let’s look at some of them. But keep in mind that this depends on the financial situation you are in right now.
You are spending too much
Let’s say, you are just starting out, but you don’t take care of your retirement or any mid- and long-term goals. You have an average income, but still, you are not able to put money aside.
Well, then it’s probably because you are spending too much. Maybe you pay too much for several products where you’ve used a financing option to pay them. This adds up and increases your monthly expenses. Maybe you go out too often or buy too many premium products. Either way, you are living above your means.
You are waiting for that extra $50
Many people think another $50 per month would be the starting point to finally put money aside. But that’s not the reason in 95% of the cases! Okay, I’ve made up that number. But mostly (if you are not earning way less than the average) you should be able to put some money aside. These missing $50 are not the problem…but your mindset is!
If you can’t handle a small amount of money, you will also not be able to handle a huge amount of cash. Therefore, focusing on making more money would just end up in spending more money. You won’t be in a better financial situation, even with a raise or another $50 per month.
You are not investing enough
Do you know what the best way is to become a successful investor? Start early and increase your savings rate. It’s much more important than picking the best stock or find an undervalued company. Let’s look at a quote from the investor legend, Warren Buffett:
Do not save what is left after spending; instead spend what is left after saving.
This concludes actually everything you can say about that. Your mindset should be saving/investing first and after that spend your money on the things you enjoy. However, keep a healthy balance.
The savings rate is more important than the rate of return on your investments. You can read more about that in this great article from The Financial Savvy.
What you can do to save more money
In all of these cases above, it’s the best to read this blog, buy a good personal finance book like Rich Dad Poor Dad, The Richest Man in Babylon or my favorite I Will Teach You to Be Rich and focus on building a financial system that takes care of your short-, mid-, and long-term goals.
You need to learn how to live below your means! As soon as you are able to do that, you are ready to focus on earning more money.
When earning more money is more important
There are also several reasons why earning more money is more important.
You are already spending your money consciously
I’m not a fan of not spending money. I think this is what money was made for. However, this doesn’t mean you should run through the city, scream YOLO and buy everything you want at that very moment. You need to spend your money wisely. Spend it consciously. If you take care of retirement, short-, mid- and long-term goals, it’s fine to spend the remaining money as you like.
But what are the options to improve your finances now? Sure, you can spend even less. But I think it’s more reasonable to use your time to earn more than using it to spend less by tracking every single penny or use 3 hours per week to collect coupons.
You’ve reached the cap of saving
Okay, some of you guys may say that there is never a cap on saving more money. Well, you need to eat. You need an apartment/house. There are things where you need to spend your money on. So these are the things that are not easy to cut or maybe even not desirable!
It’s not a good deal to save $10 on your weekly groceries if this results in having products of poor quality. You lose some of your flexibility by not having a car anymore or you buy a cheaper one without front airbags. Well, I don’t know about you but I would prefer to have those kinds of things in my life. I’m not saying you need a brand new car which costs you $40,000 or even more. But I think as soon as children come into play, a used car around $8,000 (maybe more or less) with higher safety standards is more desirable than a $500 car that falls apart by looking at it.
In that moment, where you decrease your quality of living and flexibility tremendously for just saving a little bit of money, it’s time to focus on something else than saving more money.
You really want to work a lot or build a business
Well, that’s obvious. If you are making $1,000,000 per year, you don’t have to focus on saving on groceries probably. If you love to work and you see the potential to make another $500,000 by spending more time on your business, this time is better used than saving $10 per week on groceries.
Again, if you can’t handle a small amount of money, you will also not be able to handle a huge amount of it. So make sure to first use your money in a reasonable manner and afterward increase the income.
Always take a look at the ROI (return on invest). If you put in 8 hours to save $80 and work at an hourly rate of $20, you’re making a bad deal. Also if you are more passionate about building a business, you should focus on this than forcing yourself to budget every penny.
As you can see, saving and earning money goes hand in hand. You need to earn money to save something. But it doesn’t end here. You can also increase your savings rate because your expenses become less in relation to your income. Let’s assume you make $3,000 and have $1,500 of expenses. Your highest savings rate is 50% now. If you now increase your income to $4,000 and maintain your expenses, you will have a savings rate of 62.5%.
But it’s equally the other way around. It doesn’t matter how much you earn if you spend everything, nothing is left at the end of the month. You will live from paycheck to paycheck and be caught in the Rat Race where you have to continue to work as otherwise, you can’t cover your expenses.
What do you think? What’s more important for you right now? Have you already a working system in place?