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August 07, 2006

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I say spending less than you earn is most important to true financial success.

If you are in the habit of spending more than you earn, it won't matter how much you make because you will somehow manage to spend it all. Of course, most people would eventually reach a point to where they couldn't spend as much as they make if their income were really high.

Both are equally important. They're two sides of the equation. Each affects your financial situation equally.

However, there's only so low you can go with expenses. There's a minimum floor needed for subsistence. Income, though, can be raised to theoretically infinite levels. If a person hits a floor with their expenses, raising income is the only option.

For example, the poor already have spending as low as they can possibly go. Many are unable to get ahead because their income just doesn't go much beyond their expenses. (And sometimes it's not even enough to cover those.) Because of this, their best bet is to raise their income some way -- *any* way, through extra work, job training, whatever.

They're equally important, but there's more room to increase your income than to lower your expenses.

I agree with J.D. In theory, income is boundless yet expenses hit a floor unless someone is willing to become a hermit (or move to the Midwest, ha.). As a matter of mathemtics, they're equally important. Anything beyond that depends on the behavior of the individual.

Spending less than you earn is important to avoid true financial failure. While you can not be successful if you fail, I think that the true key to financial success is the ability to earn more money.

While there are people with low income who are able to save and reach their financial goals. The less income that you earn, the more that the odds are stacked against you for financial success for you and your family.

For long term planning focus on earning more but for short term cut back on your spending.

Cutting back on spending is great advice and following that advice has kept my net worth positive through 6 layoffs (tech burst and wife's jobs combined) having to buy sell two homes in three years, and an assortment of other life events.

Cutting back is the easy thing to do but you can't conserve yourself to financial freedom. Cost of living is generally spiking while real wages are stagnant if not falling. How each person earns more money is up to them. Could mean switching jobs, more education, getting a second job etc.

I think that spending less than you earn is essential for short-term financial security, because you can outspend even the highest of incomes. But I agree with Richard, spending less won't get you a nest egg or a down payment if you never make any more, since expenses will rise gradually over time.

I think saving money is more imporant. I will never be the CEO of some major corporation making millions, but I can make the most of the money I do make and let it work to its full potential.

I think it's important for people to understand that lowering your expenses by $xxx amount is NOT the same as raising your income by $xxx. When you lower your expenses you are "saving" post-tax dollars. However, when you increase your earnings, it is pre-tax. So, let's say that I cut $100 a month out of my expenditures. To receive an equivalent amount by increasing my income, I'd have to increase it about $125 to $135 a month. The old saying "A penny saved is a penny earned" was coined before taxes were instated. A more updated version should be "A penny saved is two pennies earned."

A pre-tax penny is the same as an after-tax penny. It's still worth one cent. The difference is your tax expense increases as you earn more money while other expenses have the possibility of remaining the same. Tax is simply another expense, it doesn't change the value of money.

Flexo: A pre-tax penny IS the same as an after-tax penny, but what Eric is saying is that you won't HAVE the same amount of after-tax pennies as you did pre-tax pennies if you accquire those pennies through earning rather than saving.

Wish I had something brilliant and unique to add in order to answer the original question, but you've all already said so much so well. Right now and for me personally, spending less is the most important element, since I'm not confident, creative, or knowledgeable enough to focus on investing or entrepeneurship, which are the two fast-track paths to earning more.

Cutting expenses sounds more virtuous somehow, but speaking honestly, I'd have to say that making my income as high as possible is more important to me. I think it makes everything else easier.

I don't spend a lot of time budgeting or watching my every penny--instead, I've tried to set up a system that's as automatic as possible. Right now, a little more than 20% of my paycheck goes into savings---and 20% of a higher number is more than 20% of a lower number.

As long as I spend less than the remaining 80% of my income, I come out ahead. And even if I go a little over, I don't go 20% over, so it's easy to make up the difference.

I'm inclined to agree with others, but I believe you have to watch out for diminishing returns. Saving money can sometimes come at the expense of your time which may be better used in other ways. For example, you may save money mowing the lawn, but not if you could have performed billable consulting services in excess of the cost of a lawn service.

I agree, it is a combination of both. Living below your means creates extra money to invest with, but increasing your means while keeping your lifestyle the same will provide that much more to work with. No matter how you get your lump to invest with- the key is not to tuck it away in a sock or bank account (where it will actually be worth less over time) but to put it into investments that will have a return- preferrably a passive income that will enable you to become financially free. It just doesn't take much. I was able to bootstrap for a couple month to buy into a business that now creates enough passive income for me each month to cover all my expenses. Everything else I earn can now go directly into investing.

It is both sides of the same coin. As has already been said in the comments here, in order for there to be financial success, you have to strive to do both.

The management of expenses goes a long way toward being financially independent. Take as an example, all revolving credit card users charging beyond their means and borrowing from tomorrow to 'live' today.

So, bottom line, is it the chicken or the egg?

You must spend less than you make first. Spending more than you earn will beat making more money every time.

I believe both are important. Being financially successful can mean different things to different people. For many families, simply spending less of what they have will pay off greatly for them in the long term. However, if you're looking to really amass a large amount of wealth, it will require a combination of both smart spending/saving, and working diligently to manage your career and income potential over time.

I'm with J.D. I only really got a grip on my finances and started saving when I started making more money and had some breathing room to pay attention to what I was spending.

I don't think eating ramen for 2 years while I was underpaid would have been a good idea. There's only so much you can do to cut expenses before it becomes detrimental to your health. Eventually, you are going to have to increase your income.

I'd rather make the choice to make more money than to cut back expenses anyway. Perhaps that is the underlying philosophical choice about lifestyle. I don't mind working a weekend job as long as it's a counter balance to my day job. I used to work alone at my desk for 40 hrs in a week. To balance that out, I took a weekend retail job. I got all the people interaction I wanted over the weekend and it sustained me through the week.

I would like to live the way I want to live without economizing and I fully accept that this may mean taking another job to increase my income. But maybe that's because I've been really lucky and really good at increasing my income?

I think the most important habit to get into is to start saving no matter what your income. Every pay, get 10% of your paycheque automatically taken out of your account BEFORE you can get your hands on it and put into a savings vehcile (high interest savings account, mutual fund, ShareBuilder account, etc). You won't even miss the 10% at all, AND you will begin to build a nest egg for the future. The earlier you start, the more the magic of compound interest can work for you.

I have had over 7,000 people "financially undress" in front of me over the last 20 years. I can tell you that it is not what you make but what you keep!

If you can not develop the discipline to spend less than you make then earning more will not address this issue.

I have seen literally hundreds of families that earn 6 figure incomes and are only months away from bankruptcy if something happened to their incomes.

Save 10%, Give away 10%, and live on 80%. This is an important discipline. When the 80% becomes a large number then raise the save and give away catagories.

FMF, congrats on your traffic numbers. You are amazing!

Though both seem equally important, I'd have to say that spending less than you earn is more important because that's a habit or behavior that must be learned. Without that determination to save or spend less, I have always found that the size of the paycheck never mattered if the spending habits of the earner only adjusted upward to match the increase in earnings. As someone else has already said, the amount you make doesn't matter if you spend it all. And in some cases, the higher the income, the greater the debt may increase since the earner says of course I can afford this, I make more than I did last year!
Of course earning more is important to make that transition from one level to the next, but I know poor people who lived beneath their means for long enough to have a retirement nest egg versus poor people who know they're poor but insist that they "need things" and find that they're mysteriously trapped in an unbreakable cycle.

I like the point about spending less being a short-term strategy and earning more being a long-term strategy. And it really comes down to the fact that spending less than you earn is ESSENTIAL for financial solvency (unless you have a bottomless trust fund).

I definitely favor spending less, partly because I still have so far to go in this direction. I often feel unable to strive for a higher income because I lack the confidence, but I'm also unwilling to make that a huge priority in my life.

But it's really a luxury that I don't have to make growing my earnings a priority. If I were poorer, I would HAVE to think about income before I could think about other priorities, like having an enjoyable job, an easy commute, a job that does no harm even if it's not directly bettering the world, etc.

JD pretty much said it. It's like running a business: to survive, you need profit, so your expenses must be less than your revenues. But to grow long-term, you must grow revenue because expenses can only be limited so far. That's why when evaluating a business to buy or invest in, you must identify its revenue drivers and growth potential as well as whether its profitable.

for me, spending less than I earn has been key while I continue avenues to increase my income.

Spending less than you earn is the key to gaining wealth in my opinion. You can only increase your salary by so much, but you can always find ways to cut back on expenses.

I agree with the idea that it's spending less in the short term and earning more in the long run. You get to the point with spending less that the pennies just don't add up to much. Those people have probably already taken care of the majore money bleeders and the small things just can't equal increased income ... no matter whether it's 1 penny or 2. ;-)

Meghan,

Mathematically, you have it backwards. You can increase your income boundlessly, but you cannot always find ways to cut back on expenses. There is a minimum that just has to be spent on food, shelter, and clothing. You can cut further by moving to a third-world country if you want, but there is a limit. You cannot spend less than $0, though the real minimum for most people will be somewhat higher than $0. Possible income, on the other hand, is limitless. There will always be "one higher" (like "one louder" in Spinal Tap).

Human behavior is another story. Many people don't have the discipline to save more than they earn or the drive to maximize their income. It depends on the person.

If you're in a position to earn more, do it, and if there are ways you can cut back on expenses, do it. Just do both as much as possible and don't worry so much about which is "more important." This is a loaded question that generates a lot of discussion but it is devoid of any real meaning. "Importance" isn't something that's measurable here, and if it is, it's only on an individual level.

Earning more is the key for financial success. Spending less is working just for a short period of time. So, it is unsafe for your future plans.

Earning more is the key for financial success. Spending less is working just for a short period of time. So, it is unsafe for your future plans.

I believe both are equally important. In the short-term it is easier to spend less, and cut back than it might be to increase your income. However, over the long-term everyone should look to move forward in their careers and earning a higher income is apart of that picture.

I am in the short-term right now cutting back on variable expenses when possible.

Realistically, it's much easier and more likely that you can maximize your savings through spending less than you earn. Increases in income come over time, but spending beyond your means hurts you over and over.

Obviously, doing both is great, but spending less than you earn is a much more goal-focused, realistic and repetitive activity.

Answer is simple: Higher Income.

Reason: Inflation. You could never continuously "save" enough money to
offset the cost of inflation.

Do the math: if inflation is 4% annually and you make $40,000/year then each
year you will lose $1600 in purchasing power simply to inflation. The sole
goal of the Federal Reserve is to keep you addicted to their printing
presses so they must ALWAYS create inflation.

Alternatively, you would need to have a plan to reduce your expenses $1600
each year just to cover inflation. How easy is it to do that?

See inflation report here: http://www.bls.gov/news.release/cpi.nr0.htm

Both matter: savings for the habits it develops, and raising income for the income it produces.

At the risk of sounding like one of those guys peddling expensive videotapes, I think it's important to eventually build up external sources of income in addition to salary. For our part, we invested in a carefully-researched partnership that has done well over the years. But you can't realistically do this without at least something in the bank, so savings is what I'd emphasize if I was advising a young person.

Both. If you can get income to exceed expenses (basic cashflow) regularly, then you will be headed towards wealth. If you can get the majority of that income to be passive income (interest on investments) then you'll head towards wealth with less work. If you can trim expenses down, you'll head towards wealth faster.

Cash flow matters - very little else does.

I think for financial stability, you need to spend less than what you make. But there's a basic level that it costs just to sustain yourself and as a result it can take a long time of no crises and emergencies to get to a basic level of stability.
That's very difficult to do on a low income, no matter how good your habits are.

But for success -- which to me means long term stability (by a comfortable margin) plus the ability to provide that for your loved ones means maximizing your income.

Increasing your income can not only give you a better margin to make cutbacks or adjustments, it can provide the capital to allow you to improve the quality of your life overall, because it frees up your time. Also, increasing your income typically opens you up to better opportunities than if you earn less: you typically have better access to health care, education, social improvements (arts/culture).

Finally, when you earn more, you have a greater ability to pass down wealth to your descendents (even if its not great wealth.) Also, you can better ensure that you can care for your elderly and yourself when you get old. This kind of familial care can break a lower-income family, even if they have good habits.

I think it depends on how you define "financial success." If you mean "having as much money left over after expenses as possible," then logistically, it's probably going to be increased income that gets you there. However, if you define "financial success" as "having the ability to live your life in a way that makes you happiest and most fulfilled," cutting expenses may be a better route (or at least, it is for me).

Increasing your income can involve a lot of sacrifices and tradeoffs that may not be worth the payoffs in the end. (It may also involve taking risks that some people are not in a financial position to handle to begin with.) Saving money and living frugally, on the other hand, pushes and inspires you to think creatively about ways to make yourself and others happy that aren't centered around spending money.

I personally would consider myself financially successful if I'm able to get by while doing the work I'm most passionate about and work only the number of hours that make sense for me and my family-- requirements that might very well require decreasing income. I know that not many people define "financial success" that way, though.

I used to think that income was the most important, but I am quickly learning that saving money is key to good financial health.

Saving money (spending less than you earn through cost cutting) and making your income as high as possible (earning more money) are both important to financial sucess, but as others have mentioned, they aren't the only variables.

But, if I have to choose between them then I'd have to say, in general, for the average person, saving more would general produce greater financial success.

I believe this because people have a tendency to spend more when they make more and they generally spend more than they have. So if we're talking about the average person and they made more money, I think you'd find that they are spending more than they ever did and most likely aren't any better off financially than they were when they made less.

The key to financial freedom is spending less than you earn, period.

There are lots of arguments about the "poor" being unable to save. And a floor under which you can't save more, etc.

But I have seen quite a few "poor" with more financial freedom than people making big salaries because they are living within their salaries, being content with what they have. If you learn to be content with what you have, make your needs meet your income, then you will be fine no matter how much you make.

The person who is "poor" in a paid-for house (because they spent a hard-fought saved-up $5000 on a trailer and fixed it up themselves, so their only costs are $300 lot rental now) without everything on credit is in a hugely better position than the person who makes 100 times what they do, but have house payments on a large house, two (or maybe even three) expensive cars, half of their furniture...

I rather spend less anyone can earn more money but it takes courage, determination, commitment, dedication to save and not a lot of people have any of those a lot of people rather earn more but it takes a real person to know hey even if I do earn more I am going to know that I need to save it. My mom makes less but puts more money away some people who earn more then her have hardly put any away because they always think I am making a lot of money I don't need to worry.

Quote: "Whatever you have, spend less." Samuel Johnson

It's really this simple.

If every day, you spend a nickel less than you earn and invest that nickel, you will eventually become wealthy.

If every day, you spend a nickel more than you earn, you will eventually end up in jail and die penniless.

The raw amounts of income and expenditures are irrelevant. It is the combination of underconsumption and investment of the difference in income-producing assets that generates wealth.

I'd go with saving money. It seems like it's the easier thing to do as well.

Overall, it's not really important to pick one or the other. Just as long as you spend less than what you earn. If you want earn a lot and spend more, that's about as good as earning less and spending less in my book.

I would say that spending less than you earn is more important than just earning more because even if you earn more or your earnings has increased but if your spending habit is even higher then that will lead you to poverty. The saying that it is not what you earn but what you set aside or save that counts is applied here. Generally, there are only two ways to become rich, one is to limit your overheads or in other words spend less than you earn or cut all unnecessary expenses or two increase your income, so both are equally important for as long as you can control your expenditures. It is equally more important to say that as you earn more, the more savings must also be generated. Remember that earning more will not guarantee that it will automatically mean you will also save more unless you will it. The precedence once you make the policy of spending less than you earn will afford you the better chance to save more once that habit of saving has already been formatted in your life and as you earn more that habit will also enable you to save more and eventually invest more. So first and foremost, spend less than you earn thereby generating you means to save and invest and once that habit has been formed, the next which is increasing your income will already be moot and academic. The two concepts are equally important as you have formed the stereotype norm of saving. The other risk of just increasing more income without investment and saving is that taxation will eat most of your earnings that is why majority of successful businessmen would say that it is more important to increase your asset account and capital gains in the balance sheet than your earnings in the income statement. Personally, I put higher credence to spending less than you earn although increasing your earning is also indispensable.

I favor saving more over earning more. However, both can involve unacceptable trade offs. Some people earn a lot but hate what they do or hate the time and effort involved in earning a high income. On the other hand, you're living a miserable existence if your income falls below a certain level.

But most people in the US earn above the bare minimum needed for existence and have the ability to save consistently. Therefore, I would say saving (and investing that money in stocks, bonds, real estate, and savings accounts) is more important. If you don't learn to save, it won't matter what your income is.

I am in full agreement to this comment. We all have a basic need requirement.

If you were to make a little more money and save this would be your best route. You may want to save money on your mortgage by decreasing payments or interest.

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