What’s a Better Financial Strategy—Making More or Spending Less?

by | BiggerPockets.com

So you want to achieve financial independence, huh? You fantasize about telling your boss to take a hike, traveling the world, spending time with your family, and pursuing that passion project.

You’re not alone. I dream about the same—and so do many of the 1,000,000+ members here on BiggerPockets. At this point, most of us understand what we need to do to get there. We need to invest in assets such as the passive income from these assets exceeds our living expenses. If we boil it down, the equation looks like this:

Passive Income > Expenses

Since passive income is our assets multiplied by the return of the assets, we can rewrite the financial independence equation as:

Assets * % Return > Expenses

So what is exactly the best way to satisfy this equation?

Related: Behind on the Path to Financial Freedom? Here’s the Good News You NEED to Hear

If you listen to the BiggerPockets Money Podcast, you might think it is spending less money. If you are a fan of Grant Cardone, you might think the answer is to make more.

Like the answer to almost every personal finance or real estate debate, the answer, of course is … it depends!

It depends on where you are in your journey toward financial independence and how aggressively you want to pursue it.

This post is going to articulate the advantages of making more money versus the advantages of spending less. In this case, the advantage of one is seemingly the disadvantage of the other. For that reason, I will only be describing the advantages of each.

Let’s get into it.

Spending Less Money

Works Both Sides of the Equation

Let’s take a look at the financial independence equation again.

 Assets * % Return > Expenses.

Once this equation is satisfied and your passive income is greater than your expenses, you are financially independent.

By spending less money, you work both sides of this equation. Spending less money will increase your savings rate and thereby increase your assets — while simultaneously reducing your expenses on the right side of the equation.

Taxes

When you save $1.00, you save after tax dollars, so you can realize the entire savings. However, when you earn $1.00, you will be taxed on that dollar. The amount of the tax will be based on your tax bracket. Let’s say you are in the 33 percent tax bracket. To earn and keep that same $1.00, you would have to earn $1.50.

Actionable

If you were to look at your spending over the past few months, I bet that you could start making changes immediately when you finish reading this article. Maybe you spend too much on dining out? Tomorrow you can pack your lunch. Perhaps you spend too much on gas? Tomorrow you can start biking to work. Whatever it may be, it is likely that you will be able to take action and refine our spending much quicker than we would be able to increase your income.

Making More Money

As everyone knows, making more money and keeping your living expenses the same will also widen the savings gap, increase your assets, and take you one step closer to satisfying the equation for financial independence: (Assets * % Return) > Expenses.

Unlimited Upside

There is only so much you can save, right? If you spend $5,000 a month, the absolute most you could save is $5,000 per month. I understand that having $0 in expenses is unlikely, but I think you get the point. It’s limited.

The great part about making more money is that you can always make more. The amount you can possibly make is infinite.

There is an endless amount of side hustles that you can take up to make you more money. Some are easier to get into, while others take more time. For example, driving for Uber or getting a part time job at a restaurant could take just a few days to start, whereas flipping a house could take a couple of months and starting a blog or business could take years.

No Sacrificing

Many people in the financial independence community will talk about how relieving it is to spend only on the bare necessities and to rid of all the things you do not value. Personally, I do agree with these members, decluttering and spending only on what you need feels great!

However, I know that there is a large group of people out there that want the luxurious living situation. They want the nice car, the nice clothes, and dine at the fancy restaurants a few times a week.

If you make enough, you might be able to both save more while also living a slightly more luxurious life. But please! Do not fall into the traps of lifestyle inflation. This will do nothing to enhance your financial position.

Remember that saving is still important. The more you spend on these frivolous items, the longer it will take for you to buy your freedom.

Related: At Age 26, I’m on the Brink of Financial Freedom: Here’s How I Did It

So What Do You Do?

Okay Craig, you still haven’t answered the question. What is better? Spending less or saving more?

My best answer? Do both.

OK, if I had to pick one, I would skirt around the answer again and say, it depends on where you are along your journey toward financial independence. If you are just getting started, I would find it hard to believe that your spending is fully optimized. I would track your spending on Mint and see what excess spending you can trim down on.

Spending less is the first step in the journey toward financial independence.

If you are a bit further along in your journey and you believe you are fully optimized on a spending front, then making more money should be the higher priority.

But remember, as you make more money, do not fall into the trap of lifestyle inflation. Otherwise, you will be no closer to becoming financially independent. After all, what is it that you want? Freedom from work? Or a nice a boat that you never get to use?

First attain the freedom, then attain the boat!

What do you think? Do you think one is better than the other?

Share your thoughts below!

About Author

Craig Curelop

After developing a huge love for real estate investing and personal finance, Craig decided to join the BiggerPockets team as a financial analyst. Over the past few years, he has looked at hundreds of financial models of startup companies. His experience will help BiggerPockets reach the next level as a startup company. Craig has a passion for helping others get out of their “comfort zones” to get what they want and achieve the “impossible.” In his spare time, Craig enjoys traveling, hiking, exercising, and sports of all kinds.

14 Comments

  1. karen rittenhouse

    You’re right, Craig, it depends largely on where you are in the cycle. Starting out we spent nothing (almost literally – it was tough but we had big enough dreams and goals to make the sacrifices worth it).

    Now we’re far enough along that we’re enjoying a great home and nice cars because we’re reaping the benefits of those earlier sacrifices.

    And the earning has only increased year over year. Real estate investing totally rocks.

    Thanks for the post.

  2. Emmett Gorman

    Great post Craig. In my personal opinion, the best way to start is by focusing on spending less. No-matter where you are in you financial journey, everyone has areas in which they can cut unneeded spending.

    For beginners, small victories are a good way to get the ball rolling and build confidence in one’s self. Then as you become more and more efficient in your spending, the budgeting becomes easier. At this time, the passion for bettering yourself will still be there and now you have the time to direct that passion onto the increasing income side.

    Thanks for the post.

    P.S. Just listened to your episode on the Money Podcast, keep sharing your knowledge/experience with BP members. Me being a younger listener, a lot of what you discuss I am able to relate to.

  3. Joseph Walsh

    Good analysis, however your pros/cons have one glaring mistake from my personal perspective. Making more money does come with sacrifices. It’s time. Actually, what you could do with that time is being sacrificed. And here’s the kicker. While cash is king, time is priceless. You can always make more money, you can never make more time. Now, there is an equation there as well. More time now vs potentially more time later. And the key there is potentially. It’s not guaranteed.

    • karen rittenhouse

      Hi Joseph:
      Actually, making more money does not necessarily mean taking more time. We’re making tons more today than in the past and actually have more free time.

      Multiple ways that happens – from increased rents, to working smarter (don’t spend time where you don’t produce income like doing your own painting and lawn mowing!), to creating a down line who’s efforts make you money.

      In fact, my definition of wealth is being worth more when you wake up in the morning than you were when you went to bed the night before. Making money does not always require your time!

    • Craig Curelop

      Hey Joseph – This is a great point and something that I should have addressed. You are right that in many cases making more money is correlated with spending more time.

      Though, I think Karen has a great point that this is not necessarily true. Increasing passive income streams and working smarter will increase your income and potentially even reduce the time spent.

    • George Griffeth

      I think that’s approaching it with an earners mentality. When it’s possible to systematize and scale, making more money spending less time doing so, that should be the goal, rather than just providing oneself with free time. Make it so you’re able to make money due to how everything is organized rather than trading time for dollars.

  4. Kevin Woolsey

    Great article Craig! Focusing time/energy on saving more vs earning more is something that I frequently think about. And I particularly like the thought that a balance of both is more than likely the best answer. Very well written!

  5. Ben Leybovich

    Nice work, Craig!

    My answer is to make more. But it’s not because monetarily or physically it is a better way. I am approaching this from the standpoint of psycho-conditioning. You are what you think about. Your mind bends under the weight of your thought.

    Focusing on saving forces a view of life that is based in scarcity. This is very dangerous, especially in America in 2018.

    I may need to write a rebuttal article…but good job.

  6. Joshua Mou

    Hi Craig,
    It seems to make sense to both save and earn at the same time—like you suggested. The two activities aren’t conflicting actions but rather necessary partners. In fact, saving more in business operations leads directly to making more profit. I’ve seen the same in my persoal life. Even for those who do not invest, saving is an accessible lever to gain more wealth.

    There is a ceiling as to how much one can save. But when there are expenses to be cut, doing so is very high yield. Investing (and working) can seem like a lot of effort and time at the beginning with slow growth initially, but the benefits are uncapped. So, it seems that the two endeavors can really compliment each other.

  7. Isaac Braun

    “It Depends” I think is the best answer to this question. I agree with Ben Leybovich that making more should be the priority. For many people however, simply making more care very quickly lead to lifestyle inflation. More money in the bank, more money to spend. It takes discipline to make more and spend the same. For most I would think that focusing on spending less in the beginning should be the priority. Giving your earned dollars a purpose. As one gets close to Financial Independence, we’ll say 75% of the way to FI, then would be the time to say that your lifestyle is optimized, its time to turn on the turbo boosters and strive to make the most as possible. Taking a job that is less paycheck based and more commission based, Really trying to figure out just how high you can take it.

    That’s just how I would do it. Looking forward to others responses.
    livefiandfree

  8. Ed Emmons

    Great topic and well written article. I think everyone should give thought to it. You can reach the financial independent status much quicker if your expenses are low because it takes less residual income to cover them. When I started investing, money was never the object but rather my time freedom, as it still is. @josephwelch mentioned that it takes more time to make more money and that certainly is not true. As the late Jim Rohn said to make more money you simply need to become more valuable to the marketplace. That requires self education. The book Cashflow Quadrant is a good place to start. Then make it a study how others make and have made a lot of money and do the same. Most people that live extravagantly are not wealthy but rather do it to impress people. If they were to lose their job, it would all go away very fast.
    So if one wants to get there quickly, cut expenses, increase residual to exceed those expenses. Once that is done and you want to up your standard of living, increase your residual first to cover the increased expense. That way you never “have to” work and you can take as much time off your business as you want.

  9. George Griffeth

    I’d personally say earning. Saving can be done with peripheral attention, the main focus should be on earning more. I love being frugal and saving as much as I can, keeping an eye on my books and seeing where my money is going, it’s definitely the first step I’d say. But once you get the hang of it after the first month or two, I’d say it’s time to switch focus on increasing income. Make keeping expenses low an unconscious habit as quick as possible (it’s totally necessary).

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