When it comes to building real wealth and dramatically improving your net worth, investing is usually the way to go. And the best way to successfully invest is to start early. This way, you allow your money to compound over time – and compound interest is a far more powerful factor than even throwing tons of money at your investments late in the game.
But when you’re just starting out, coming up with a sum of money every month for the sole purpose of contributing it to your investments in order to grow your wealth isn’t easy. You may head into to the personal finance blogosphere in hopes of figuring out how to come up with more money to invest. If you do, you’re likely to be bombarded by two schools of thought that approach this problem from opposite angles.
You have those who will implore you to save money with great diligence, and you have those who urge you to simply make money to increase your monthly cash flow. Which one is right?
Save Money or Make Money? The Frugal Argument
Those that would argue that saving money is the way to go are generally frugal people who live well on less with ease. They don’t want for much and are able to save big chunks of even smaller or just average incomes.
Savers will analyze the little things, and be the ones to tell you your daily latte habit is costing you over a thousand bucks per year. They know that cutting cable can save families $500 to $1,5000 annually. They’ve added up how much you could save if you rode your bike instead of drove your car, raked leaves instead of pulling out the leaf blower to do it for you, and tackled DIY fixes and maintenance around the house.
Mr. Money Mustache would be a great “save money” representative. He argues that you really don’t need much at all to not only get by, but to be happy doing it. The “Mustachian” view is one that encourages minimalism and DIY for just about everything, and completely shuns materialism and excess. For most average people who live in a nation of abundance, like the United States, you can live well on something between $20,000 and $40,000 per year – and sock all the rest of your income away into investments.
What the Savers Have Right: The savers have this whole mass-consumer thing figured out – and beat. Material goods will only serve to drag you down and cause you to be stressed and unhappy. We don’t need all the things marketers and advertisers want us to think we need, and a minimalistic approach to life is a really liberating one. Savers advocate for doing something better with your money than blowing it on frivolous spending, and that’s an argument anyone who is interested in building wealth should get behind. Not to mention, the savers’ approach will lead to being less wasteful, more resourceful, and expressing gratitude for all you do have – rather than allowing your focus to linger on what you don’t.
Where the Savers Fall Short: The problem that you will inevitably run into is that you can only cut so much from your budget. You can only eliminate so many expenses before you start depriving yourself of a decent, comfortable life.. and those of us who are starting out with smaller incomes don’t have far to go before we’ve reached out expense-cutting-threshold. While Mr. Money Mustache has some awesome ideas, he and his wife made six figures annually while they were working. When you are makin’ bank, it’s definitely easy to save more. When you’re starting out with hardly enough to cover the bills, this argument starts coming up short.
Save Money or Make Money? The Mogul Argument
Coming at the money problem from the opposite end are the people who believe the easiest way to get more money is to make it yourself. They say you can get out there and earn what you need.
These are the entrepreneurs, the career-driven individuals, and the ones who dream about business empires. That daily latte? Don’t worry about it, champ, as long as it will power you toward your next big idea, help you land your next high-paying client, or get you through a long night of finishing up your latest product that will launch then next day. Earners argue that, essentially, there are bigger fish to fry and no one has time to stress over a $4 coffee drink when you’re busy raking in profits.
Ramit Sethi has turned this way of thinking into an incredibly profitable business (imagine that!) and a successful blog and book called I Will Teach You to Be Rich. His no-nonsense, no-apologies approach is all about increasing your income as the real way to serious wealth.
Ramit’s argument is compelling, too. He’s been ridiculously successful – and he’s worked hard to make that happen. He’s a smart guy who has valuable insights to share via his posts as well as his courses. Plain and simple, he believes in making money. And he believes you should be making more money, too.
What the Earners Have Right: The fact that you can make more money is absolutely true, and earners have been eagerly spreading the news. There has never been a better time than now than to make what you want out of your career. It’s easier than ever to become an entrepreneur in the digital economy and launch an online business that allows for more freedom – and more earnings – than the traditional business model you may be stuck in now. Plus, earning more is going to make it a cinch to invest more. It’s pretty hard to say, “you know, I don’t think it’s worth earning more money to reach my financial goals faster.” That just doesn’t make sense!
Where the Earners Fall Short: Sometimes to make more money, you have to work. Hard. And you have to take big risks if you want big rewards. This simply isn’t feasible all the time for every single person. It certainly is easier to start with saving more over making more.
Not to mention, big-time earners can be wasteful. They can blow money and make stupid spending decisions simply because they have the money to do so with. Earning money is great – but it comes with some caveats. Making a ton of extra money will be for naught if you’re not disciplined enough to invest the majority of it.
Which Side is Ultimately Correct?
Because personal finance is personal, there is no one right answer. What may get us closest to a straightforward conclusion, however, is to seek a balance.
There is nothing wrong with saving money. After all, most of us truly do make enough to live very comfortably without spending every last penny of our monthly incomes – and we could stand to be a little less wasteful and a little more resourceful. But there are serious limits to this, and if you stick to only trying to save money you may be at it for a really long time.
Earning more money, on the other hand, is going to accelerate your wealth building. Earning more is going to get you on the fast-track to reaching your financial goals. It’s also going to provide more security should something go wrong (as long as you don’t give into too much lifestyle inflation).
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Aiming to do a little of both seems like the most sound, sensible strategy – but there are strong proponents of doing it one way or another in both camps. What do you feel is the best way to increase the money you have available to invest in order to build your wealth? Do you prefer saving or earning more?
Anneli @thefrugalweds says
Thanks for the very cool post, Kali! I’d have to say I’m split down the middle here and I love both Mr. Money Moustache and Ramit.
For us, we try to be as diligent about our savings and keep increasing what we’re socking away for retirement. We don’t live in excess (although we still have cable and season tickets to UCLA football!) But there’s something to be said about finding ways to make more money – like finding new side hustles along the way.
It’s always a balance for us – we prioritize our spending and make sure that we’re socking away for the future. But we’re also still working hard and putting in our extra hours to make sure that we’re expanding our income potential. I’m a believer that the two philosophies can coincide!
Kali Hawlk says
I feel the same – I like both MMM AND Ramit Sethi. I think they both have valid points and I try to strike a balance between their two firmly entrenched philosophies and ideas 🙂 I couldn’t agree more with you that you can believe in both, and make both sides work for you to grow wealth and have financial success!
[email protected] says
Couldn’t agree more with two schools of thought. I’m more on the entrepreneurial side and only save to risk more while not spending more than I need to.
Grayson @ Debt Roundup says
This isn’t much of a debate in my mind. I do both. After I reach a point where I can’t save any more, then I just go on making more. Don’t see why you can’t do both.
Money Saving Dude says
I have an idea. Why not just do both? Save more and earn more all at the same time. Wouldn’t that be awesome? 🙂
Dee @ Color Me Frugal says
We also try to do both, although I suppose we trend a little more toward Ramit’s type of philosophy. But we are also making more these days than we’ve ever made in the past, so we don’t sweat the little things as much partially because of that I think. But we have also sort of shifted our mindset to think more in terms of overall picture and focus on increasing the amount of dollars that flow into our bank accounts each month both passively and actively.
Interesting to see both sides of the argument so thoroughly laid out. I don’t know whether I’d agree that one is better than the other, like many people argue; I think that there are merits to both sides of the coin, as you pointed out, and there needs to be a balanced approach.
I strive to always make more money, and that is my primary focus. My lifestyle does inflate in response, but I take a look at my expenses and spending every few months to control it. I negotiate my bills and talk down fees, to save money because it’s true; a penny saved is a penny earned.
Currently I’m all for saving the money.
These two strategies are not opposing ideas or mutually exclusive to each other, so your question does not make any sense. You can spend less and make more money at the same time. Over the last 4 years, I’ve cut my spending and increased my income by significant amounts.
There are times where it pays to cut spending uncomfortably deep, such as during a debt snowball. In general it makes sense to evaluate you spending at least quarters to stop lifestyle inflation before it goes too far. It makes sense to both host and diversify your income as well . I review my income sources twice a year to see where I can increase it.
‘spend less make more’ is a cohesive mantra ,not two opposing ideas where you must choose one or the other .
Jon @ Money Smart Guides says
To me, it’s all about balance. But not a 50/50 balance, more like an 80/20 balance. I keep my spending in check and review my big expenses annually to see if there are ways I can knock them down a little bit. After that, I focus more on earning money since I can earn a lot more than I could ever save just by savings alone.