Before we get into the article, I want you do something for me.
Hold your hands one foot apart, palms facing each other.
Look at the gap – that’s how much you’ll save by cutting expenses.
Don’t move.
Erase that idea from your memory.
Look at your hands again – that’s how much you’ll earn with a raise.
Now, move your hands two feet apart.
Look at the gap – that’s how much you’ll save by cutting expenses AND earning a raise.
There’s financial hubbub on whether one should focus their attention on cutting expenses or earning more. Recently, two articles, David and Ramit, had me thinking about this idea.
When asked what’s best, people will point their thumb either to the left or right. When asked the same question, I point in both directions.
You’re probably thinking, “Oh what a cop-out taking the middle road”.
First, I have a personal preference towards earning more, which I’ll mention later on. More importantly, hopefully you will realize that the ONLY answer is BOTH after reading this article.
Why should this be considered: “the only answer you need to know”? Because your financial system does not move linearly in one direction, and we need to compensate by taking a systematic approach to optimize our finances.
I love analogies. Everyone who knows me will tell you I love nothing more than finding indirect comparisons to make relationships. So here goes.
Think of Michael Phelps. He consumes roughly 4x the recommended daily caloric intake, yet his abs are red carpet featurettes. Offsetting his immense consumption with vigorous Olympic training, he’ll be a great example. We’ll relate his eating to expenses and workouts to earning power.
WHY YOU NEED TO SAVE MORE. If he stops swimming, but keeps eating the same amount – it won’t be long before his speedo doesn’t fit so well. The real world example of this was everyone who thought that their income could never revert, and would continue to increase by leaps & bounds. Their spending was controllable only through their income, and once that buffer inverted…. they were screwed.
WHY YOU NEED TO EARN MORE. If his concern focuses instead on cutting supplemental meals, but keeps training at the same intensity – it won’t be long before his “as is” body gives out since it won’t be developing. The real world example of this are those who look more behind than forward. By focusing their attention on addressing the back-end components (i.e. saving more), they are missing out on opportunities to grow and develop themselves (i.e. earn more).
In order to appreciate that we need to focus on earning more AND spending less, we need to apply basic math principles. BOOOO! It won’t be boring or painful, I promise. I spent time preparing graphs, but scrapped them when I realized it was a lost cause.
Remember the hand exercise? Those are our bounds.
Your expenses will always be greater than zero and your salary cannot increase infinitesimally. When you understand there are constraints on both ends, you look within the limits and realize you can OPTIMIZE your system by pushing your variables (earning more and spending less) as close to those limits as possible.
Whether you cut 15% in expenses or receive a 15% raise, the results are more or less the same (more or less because there are long term differences). However, cutting your expenses AND earning a 15% raise results in TWICE the savings, or 30%.
That’s a pretty simplistic example, but consider the effects of variable rates. What if Friend A earns a 10% raise, while Friend B earns a 4% raise and cuts expenses by 7% – who got the better deal?
Once you get really good at cutting expenses, it’s much harder to extract more savings out of additional cuts. The reality is we have the most potential to increase our savings by increasing our earnings.
Although I think increasing your earning power is the “optimal” solution, there’s risk / reward with every decision we make in life. For right now, I’ll end the post here but will look at writing another highlighting the different risks/returns between each type of earning.
Photo by Jeremy M Piehler