Spend less or Make more?

Does achieving financial independence come from significantly limiting one’s expenses? Or, does it come from significantly increasing income? Does one method outweigh the other? As with everything else in life, the answer is: it depends. Although – for the most part, it is a healthy mix of both.

I’ll try to break it down.

reducing Expenses

When it comes to saving money, there are two overarching expense segments to consider: Fixed Spending, and Discretionary Spending. Fixed spending is your set of essential expenses that you need to live, such as housing, eating, transportation, etc. Discretionary spending is your set of non-essential expenses such as entertainment, travel, restaurant dining, hobbies, etc.

Now that we have that covered – let’s think about reducing expenses. While it is wise and doable to reduce expenses, you can only reduce expenses so much. Yes, you can mostly get rid of or reduce a lot of that discretionary spending, because those aren’t entirely necessities. But your fixed spending cannot be reduced beyond a reasonable level. You’ll always need housing, food and a means to get to work (if you have an on-site job). While you can relocate, shave utilities a bit, and opt for cheaper groceries to cook at home, you’ll reach a point where you just can’t cut costs down any further.

Increasing income

This is when increasing your income starts to look more appealing. By increasing your income, you won’t have to cut those discretionary costs as much. You’ll no longer be “just getting by”. In fact, you may have more to spend on that discretionary spending bucket and opt to buy flashier and more luxurious products. The problem with this, however, is that just like you have an imaginary “floor” for expenses that you cannot dig below, in most cases, your income potential also has a “ceiling” that you may not be able to break out of.

But let’s assume the sky is the limit. Let’s say you’ve landed your dream job and have a bunch of investments or started a great business and things are just looking up in the future. How do you achieve financial independence, if you wanted to?

Well, you’d still need to control and shave those discretionary expenses as much as possible. And here is why: Financial Independence is not achieved solely by reducing expenses or increasing income. It is a byproduct of your effort to do both. If you don’t do both, you’re setting up a recipe for disaster.

Rant

This may be a generalization, but if you look around, it’s usually not the people with the six-figure jobs and big houses and Porsche Caymans that achieve financial independence under their 50’s. It’s typically those, who may or may not have a six-figure income but certainly do not have to flashy houses and cars and Gucci bags. Why?

Because those who are truly serious about financial independence do not increase their expenses relative to their income.

This is the problem with conventional society. We go through high-school, then university, and then we land our first job. With that first job, we blow all our money on the things we’ve always wanted: Moving out of the parents’ house, buying that nice german car, eating out with friends, and traveling the world. By the way, there is nothing wrong with any of this. But, a few years later, we land another job with a nice bump in salary. Then another one, and another one. And all along with these income boosts, we’ve also continuously upgraded our lifestyles. We went from the cheap rental apartment to a luxury condo, or a big house. We went from that entry level Audi A4 to a much more expensive Audi S5. We bought a bunch of designer apparel we didn’t need. So what’s wrong with this picture? We have no damn savings! Every incremental dollar earned, we spent on things we didn’t need. The problem with this picture is that this lifestyle is not sustainable. If we lose our job – our only source of income, all those bills still need to be paid and we have no strategy to carry forward this lifestyle.

best of both worlds

To prevent these unanticipated challenges, my best advice to you would be to gradually increase your income, all while keeping those discretionary costs low and stagnant. Getting a raise, or bonus, or any form of added income should not be looked at as a ticket to buy more nice-to-have things. Instead, look at it as your ticket to achieving financial independence even SOONER, by means of saving and investing that residual income, and having it work for you in a compounded fashion!

Thus – as obvious as it may already be – in order to achieve financial independence, it is advisable to minimize discretionary spending and increase income simultaneously.