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.
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.