Making More vs. Saving More

by JT McGee

There are only two ways to run a personal budget surplus:

1) Make more
2) Save more

I couldn’t believe it when I discovered this was a controversial topic in personal finance. Some say you should cut your budget like crazy to have more money. Others say you should simply focus on earning more. I want to add a little more to this discussion.

Thinking at the margin

Making more or saving more is a decision made at the margin. You’re starting at X, your current earnings/budget, and hoping to go to X plus or minus Y.

So, two things. First, taxes. A marginal dollar saved has a bigger impact than a marginal dollar earned. If you earn at a marginal tax rate of…say 35% all-in, then $1 of additional income is really $.65 of post-tax savings. Therefore, a dollar saved is worth more than a dollar earned.

Savers are winning thus far.

But what about growth? Generally, income scales exponentially (to a point) with experience, etc. Say you work really hard at work and tend to go out to eat more often as a result. Those meals cost…say, $250 per month. That’s $3,000 post-tax. However, if you get a $5,000 raise from a promotion, you win. If you generally get a 3% COL increase each year, that $5,000 raise compounds each year, so your hard work pays off over and over again.

What’s better?

Why not both?

I’ll be honest: I save more than half of my income but still spend frivolously. No, I don’t drive an $80,000 automobile – my car is worth all of $3,500 on a good day. Nor do I spend a lot on electronics, although I have too many. And I don’t particularly care for a big living space.

But I don’t really bat at a $20 meal, $15 taxi fare, and $65 in…well, liquids, for a fun time on the town every once in awhile, either. It’s a price I’m willing to pay for fun.

I think I finally found my sweet spot, a comfortable place between pauper and “baller.” If I were to cut my budget, I’d just work less – those marginal dollars aren’t worth it if I can’t use them.

So why not make that the goal? Add income until your next dollar provides no value unless spent. Spend until your last dollar provides no value unless saved.

Turns out that’s just a more complicated way to say “spend and save your money how you see fit.” Each choice has implicit and explicit outcomes. As long as you’re aware of each outcome, make your own decisions.

{ 8 comments… read them below or add one }

The Phroogal Jason July 15, 2013 at 23:06

Exactly. Why you why not both?! I think It’s important to figure out ways to make more money but at the same time save more by cutting out expenses and paying down debt.

i asked this recently, “Why does it seem that we don’t value making an extra $10 on our paycheck more than the $10 we saved using coupons or discounts?” Oh wow I just saved $10 on this jacket I bought. Really? I only got a $10 raise?

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JT McGee July 18, 2013 at 11:01

Yeah $10 doesn’t really motivate me to do much, but I like saving $10 here and there. I’ll Google for 5 minutes to save $10, but that’s about it. Noticing $10 more in cash flow each month wouldn’t do much for me, yet they’re the same thing. Interesting.

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PK July 16, 2013 at 10:03

Perhaps if the saving vs. earning battle wasn’t actually a crusade – people are downright religious in their convictions.

I like you quoting the Taco Girl. Why not both?

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JT McGee July 18, 2013 at 11:02

It’s like politics, man – you gotta pick a side and root for your team. The way I see it, more money is more money, regardless of its source (savings or earnings).

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Jonathan July 16, 2013 at 14:42

I have been coached toward the “make more money” side of the equation, but I practice both sides. It’s all about finding a healthy balance that permits wealth-building. I aspire to wealth in order to give/spend/relax/travel/have security, so I choose not to live like a pauper, but at the same time I won’t spend on things that I’ve determined aren’t important to me.

Like you, I save over 50% of my income and like you I spend without being concerned with the cost – on some things. That is because I have figured out what types of purchases make me happy and the sorts of things that don’t. I don’t sweat the price of a coke at a restaurant – if I want a coke, I buy the coke. But I am not interested in buying a bigger TV, because I know that the size of my TV doesn’t actually matter to me. And I haven’t bought a nicer, fancier car even though I’ve been tempted, because I remember how little time it took after I bought my current car brand new 7 years ago before it was just my car and no longer a thrill to drive.

As my income has progressed over the past few years, I’ve thrown more and more types of purchases into the “don’t worry about it” category (like the coke). If I were still making what I made out of college, I’d even be thinking twice about the cokes (even though I could easily afford them then too).

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JT McGee July 18, 2013 at 11:09

Interesting, because there are countless people who might be irked with your “lifestyle inflation,” even if it just means a soda. I, for one, have to have a soda with a meal out – soda from a fountain is one of God’s greatest gifts to man.

Honestly, I think there’s a simple predisposition that some people have to building or maintaining wealth. A bigger TV doesn’t really interest me. My 40-42″ TV is already excessive, but it was a deal (free?!) I couldn’t pass up. Likewise, I have four desktop screens on my desktop, but they were all free, acquired through the purchase of another computer, or purchased very minimal price. Funny, my all-in price for my stupid collection of electronics is less than the cost of a new middle-of-the-road Mac laptop. In all the expensive categories, I’d prefer to have a lot of inexpensive stuff, generally speaking.

The few splurges I really have are on experiences. Fun costs a lot of money. Material possessions? Meh – just more to maintain.

Eventually, though I’m going to HAVE to splurge on something. I have the itch. It’ll probably be a modest home.

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Felix Lee July 20, 2013 at 09:09

I’d definitely go for the two. It is not possible to earn more and save more at the same time.

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David @ PBC July 30, 2013 at 15:16

Making more money goes hand-in-hand with savings. It is not wise to overindulge so we will always have something left especially when times get tough.

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