The two main topics we focus on at Young Adult Money are making money and saving money.
Whether it’s explaining how to organize your coupons in an Excel Spreadsheet or how to save money shopping at Target, we are big advocates of saving money whenever possible.
When push comes to shove, though, making money is better than saving money.
There are many people who disagree with me and think that saving money is more important than making money (or increasing income). One argument I’ve heard from those advocating saving money over making money is that people should focus on being happy with their income and make changes so that they can enjoy life regardless of their income.
I don’t disagree with living a quality life regardless of income, but the fact of the matter is that everything – investing and yes, saving – is easier when you make more money. I also think a lot of people resign themselves to a certain level of income, believing that they are “stuck” at a certain income level.
Allow me to illustrate my point through a simple example: the “DINK”.
The Power of the DINK
DINKs are a great example of how making money is better than saving money, or at least should be prioritized. DINK stands for Dual Income No Kids. Now, a dual-income couple is better-off than a single-income couple for one obvious reason: the expenses a couple has are typically the same whether both are working or not.
Yes there are expenses that come with having a job. Whether it’s the car and gas needed for commuting or the wardrobe necessary for having a career, these expenses are typically minimal compared to the value of a second income.
Let’s say one person in couple makes $70,000 a year. Let’s also assume that the couple could reasonably live off of this income alone. If the second person also works and makes, say, $70,000 a year, that additional income could be used entirely for investing, saving, and debt. While cutting costs and saving money is great it simply doesn’t compare to the impact that increased income can have on someone’s finances.
In case you were wondering, the “no kids” portion of DINK isn’t relevant for this example; I just really like the personal finance term “DINK” ;)
College Degrees & Promotions
While I think the DINK example is the best illustration of why increasing income is better than saving money, I think it’s important to share a smaller-scale example of how increasing income can have a big impact on personal finances.
When people talk about college these days, most of the focus is on the ever-increasing costs of a degree and paying down debt. I don’t think this is a bad thing to focus on; after all, grads need practical advice on how to manage student loan debt. What we need to acknowledge, though, is the significant impact a college degree can have on someone’s life. The most notable impact is clear: increased income.
A college student can go from making $10 an hour to making more than twice that upon graduation. The increased income typically not only stays with them forever, but also allows for future increases through their career path. If saving money was more important than making money, far less people would pursue a college degree. College degrees are all about making more money and increasing income.
On a similar note, the power of promotions and higher compensation shouldn’t be understated. Even a 10% raise can have a big impact on finances, especially if the person getting the raise has a handle on their finances and are already living below their means. For someone making $50,000 a year, a $5,000 increase can have a significant impact on their finances long-term, especially if they divert it to retirement funds and other investments.
Executive Compensation
Another great example of how making money is better than saving money is executive compensation. Executive compensation is an “extreme” example of how making money is better than saving money, but it’s a good example nevertheless.
Most executives make in excess of six-figures a year; some make in excess of $1 million a year. While their jobs are most likely stressful and their workdays long, the compensation they make can create financial security within a few years. Some executives who make in excess of seven-figures could realistically retire after working just a couple years.
While the other examples in this post are easier for a regular reader to relate to, I think it’s important to point out the fact that higher and higher income has a much more drastic impact on finances than savings ever could.
Lifestyle Inflation & Other Counter-Arguments
The obvious counter-argument to everything I’ve said is that lifestyle inflation can dilute the impact of increased income. I think that’s a fair point, but I don’t think lifestyle inflation is always a bad thing nor are people resigned to lifestyle inflation – it’s a choice.
Let’s go back to the DINK example. Even if $20,000/year of the second $70,000 salary is put solely towards lifestyle inflation there is still a full $50,000 incremental income that can be used primarily for improving the couple’s finances. That’s a 70% increase over the single-income take-home of $70,000. Even smaller incomes can have a big impact. If the first salary is $70,000 and the second salary is $30,000, that’s still a 43% increase for the DINKs.
The reality is that lifestyle inflation is going to happen and it’s not necessarily a bad thing. As long as a portion of an increase in income is set aside for saving and investing, the person receiving the raise is better-off financially than they were before the raise.
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The debate over whether to focus on making money or saving money will be never-ending. Most people end up taking a balanced approach to the topic, while a small group of outliers on each end focus almost solely on saving money or making money.
I encourage anyone looking to improve their finances to not look solely at cutting expenses, but instead taking a look at what they can do to increase their income. This can come in the form of a new job or an entirely new income stream.
What do you think is better? Increasing income or saving money? How much time and energy do you dedicate to each?
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First Photo by Damian Gadal
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I think it’s important to know how to budget, live frugally and spend wisely, but you have to actually MAKE the money to invest, get out of debt, etc. Making money is the most important thing, as long as you know how to handle it…that’s the absolute first step.
I would have to agree DC. Saving money is great and, of course, support it myself but it’s only going to take you so far. I look at our own personal situation and while we’ve saved relatively well for the majority of our marriage it wasn’t until we started earning more that we really started to see some solid traction and it’s not really rocket science – if you make more then you’re going to have more opportunities to grow your wealth.
MoneyMiniBlog Good point about budgeting. If you make a lot of money it’s no guarantee that you will be better off than someone who makes less. I think it’s important to recognize that making more money can oftentimes have a much bigger impact than focusing on cutting expenses.
FrugalRules Thanks for sharing your thoughts, John. I have also seen the relatively big impact making more money has had on our finances as well. It’s something I think people should focus on more, or at least be mindful of.
I go back and forth on it. On my blog, I’ve written about how a dollar saved is undeniably more powerful than a dollar earned. But, obviously, you can earn more than it’s possible to save. It just takes more time and effort, since very little in this life is truly passive.
Your point about everything being easier once you earn more is critical. It’s very easy for us to have a 70-80% savings rate now that our income is where it is.
My general rule of thumb is to focus on savings first as it is low hanging fruit that can be harvested right now. It is very important to focus on earnings as well though, usually as a longer term goal. Doubling or tripling your income is not low hanging fruit. It often involves planting a whole new tree.
I am a fan of looking at both cost reductions and savings but also earning more; however at the end of the day, the only way you can truly get far financially is to focus on making more money. One of the reasons I left corporate America was that I knew my earnings potential was capped out by my job. Now that I have my own business, my earnings are only limited by the amount of time and energy I am willing to commit to my business. For me, it also feels better to bring in more money rather than think about how much I have saved.
As others have said both have value. However, one’s income potential is theoretically unlimited. Conversely, we can only save so much. Plus, an increase in income will lead to the potential to save more. But saving more will not lead to an increase in income.
I take a very balanced approach when it comes to choosing whether saving more or earning more is the most effective. I do a good job of cutting my expenses and living frugally, but I’ve realized that you can only cut back so much. On the other hand when it comes to earning more the sky can be the limit. I actually dedicate a lot of time toward working at my main job and earning promotions along with side hustling but if I didn’t train myself to save aggressively and live below my means the extra money I make wouldn’t be used properly. So the two go hand in hand for me but lately I’ve been focused on earning more since I’m already well grounded in my frugal ways.
DonebyForty I agree with you about focusing on saving money in the short-term. Definitely good to tackle the “low hanging fruit,” as you referred to it as. I do agree that increasing income takes a significant amount of work, but it’s so much easier to increase your savings percentage when you are earning more (as you stated).
blonde_finance While I certainly am happy whenever I am able to save money (especially when I am able to save money consistently over time, such as at Target), I feel much better about making more money as well. If you are able to sustain increased income, such as through a promotion, it can have a huge impact on your finances.
Brian @ Luke1428 Yes, I definitely did not want it to come off as though I thought saving did not have value. I think saving can have a lot of value, but to actually see your finances improve it sometimes does take that higher level of income. It’s just so much easier to save 10% more when you get a 10% raise.
Chonce I think you and I approach things in a similar way. I definitely think there is value in minimizing expenses, but if you can do that in tandem with earning more money you are really setting yourself up for success.
Both are important but I agree that earning money is ultimately where you should put your focus. I do believe that you do need to first examine your spending and stop any leaks you have (and almost everyone initially has some), spend mindfully and follow a budget, but to truly get ahead and create wealth, you likely need to earn more. There does come a point where you can reasonably not pinch another penny out of your life. Everybody’s threshold for that point will differ, some would eat ramen noodles every day happily and I won’t. I also don’t have an issue with planned and mindful lifestyle inflation based upon goals and on the things that truly matter to you, not playing keep up or trying to make others jealous.
I like to focus on both, although there comes a point where you’ve almost cut back as much as you can without maybe making a very huge transition, like for me that would be moving out of state or in with a roommate. But I also want to earn more. I don’t think it’s selfish or greedy. Money to me means more security, not necessarily “things” and “stuff”
Obviously, both are ideal. But I think a lot of people forget that many simply can’t make more money. People who have health problems are an obvious one (and is my own issue) but also people whose lives just can’t bear any more. Schedules are packed, stress limits are reached, etc. For those people, it’s easier to find ways to cut back expenses.
While I believe both are important, I will have to go with increasing income. I’m putting a lot of time to do it with a FT job, website and eBay hustle.
Great post DC, I know I say this a lot but genuinely mean it on this one.. This opinion could be influenced by my bias towards earning over saving ;)
Having said this, completely also agree on the importance of “saving” the extra income that you do earn and putting this into appreciating investments/assets..
The reason I think it’s easier to earn more is that you can then still spend the same amount and not decrease your lifestyle, thus not causing pain by changing habits as opposed to looking to clip copouns and obsess over every $$.. Congrats to the people who can focus on saving those kudos to them! :)
I think we’ve cut out most of what we’re willing to cut, so our main focus is about earning money and building wealth at this point. The more you make, the more you are able to save
I just focus on having babies and try to keep up financially. The DINK days are long gone.
ShannonRyan Thanks for sharing your thoughts Shannon! I agree that the lifestyle people are happy with will vary greatly. Some people will be happy with a “tiny house” until the day they die, and an extreme minimalist lifestyle. Others that simply doesn’t work with their goals – can you imagine a tiny house with 4 kids?? So yes I think realizing what your priorities are is important.
Beachbudget Security is huge, and I am on the same page as you. I think a lot of people misinterpret people’s pursuit of money because some people truly just want that security to know “I’ll be okay” even if TSHTF.
AbigailP I realize my post can come off as unsympathetic to people who can’t make more. As someone with chronic health problems of my own, I’m very sympathetic to people who have chronic conditions or conditions they are working through. I do think cutting back expenses should always be the first thing people should pursue, but if you are physically able to it’s always important to realize the impact that increased income can have on finances.
Jason @ The Butler Journal You are killing it, Jason! It’s great to read about your progress on your blog and I know you are really crushing the eBay side hustle.
mycareercrusade Trust me, I never get sick of you (or anyone else!) saying that I wrote a great post! I was hesitant about posting this for some reason, but I’m glad I did. I think you’re right though, you NEED to save some of that extra income to truly give your personal finances a boost.
Mark@BareBudgetGuy Haha epic comment, Mark. I’m going to make the DINK lifestyle last as long as possible! Kids are great too, though.
Eyesonthedollar You guys seem to be doing a great job of maximizing your income and finding new sources of income. I’ve enjoyed reading your posts on the topic.
I think we’ve found our natural balance with spending, and like to think we wouldn’t succumb to lifestyle inflation if (when!) our income increases. I feel like the focus on earning more is also a great mindset, it just seems so much more ‘positive’ than cutting expenses, as it usually involves you growing as a person and developing your skills, and creating something of value for the world. Although there’s huge merit in learning to ‘need’ less and simplify your life by saving more of what you earn – I just think there’s far more horsepower in earning more.
I will never be a DINK again for I am a single mom, but I believe that if your a DINK you should maximize the time without a little person to look after and stack your coins. Once the little people take over your life and home, its like they put a secret invisible hole in your wall and your money just slowly leaks out.
I agree with you. Unless your spending is out of control (in which you’d need to get a handle on that first) then you need to focus on earning more IF you’re working on big financial goals. There’s stuff I could cut out of my budget but nothing that I really want to. So for me it makes more sense to earn more money.
I’ve always been on the earn more bandwagon. Frugality only goes so far.
We are all about maximizing the DINK lifestyle, it’s pretty darn awesome. I recommended it to a younger friend this week… too bad it’s easier said than done! Saving and earning more are a part of the same coin, but increasing income is the place to get, by far, the biggest bang for your buck.
Jason@Islands of Investing Great point about how earning more typically involves learning something new and providing value. That’s also a big reason why earning more typically takes more time than cutting expenses, but long term it can be worth it.
Debtfreemartini Oh my, that is quite the image! I can understand why people rush into having kids quickly after getting married, but I think if you can wait there is a lot of (financial) benefits to be had.
SingleMomIncome Yes, I agree that you should focus on cutting expenses before you focus on earning more. If you can consistently save money every month by cutting something out of your budget or saving money on a weekly or monthly purchase it can have a big impact on your finances.
moneypropeller I am a big advocate of waiting to have kids, if possible. There’s really no reason to have kids in your 20s. I think DINKs have an undeniable advantage over their non-DINK counterparts.
DC @ Young Adult Money moneypropeller I completely agree. My fiance will start earning next year and we’ll be able to pay off her grad school loans within a year by just allocating her salary to loans (already live off of just mine). After that, it’s home free! We’re putting off kids until the early 30s to travel the world and maximize the amount of money we can sock away to compound over the years.
Jay
I think the important thing to realize is that there is a floor on how much you can save. There are only so many things you can cut from your spending until you are left with the bare necessities.
I personally only spend about 20% of my energy trying to reduce expenses every year, and the other 80% is focused on activities that earn and have the potential to increase my income.
But I am also not someone that will never be in the super frugal camp because its not my style. I love reading from these people like MMM.
The thing about increasing your income is that the sky is the limit. You infinite earning potential.
Got the DINK thing going on, now I just need to get me some of that sweet executive compensation.
In the end income is what fuels savings, so its kind of interrelated obviously. And depending on your goals, you may want to try and add fuel to the fire to get to where you want to go faster. And if early financial freedom is the goal, then a higher income will lead to a higher savings rate, and thus an earlier freedom date.
Cheers!
We are trying to cut on our budged but we understand as well that making more money could help us to have more stability and to achieve bigger dreams. In my mind both are important, I would say : make more money and cut your expenses where you can in order to save more and to have the possibility to pursue your dreams.
Gen Y Finance Guy Thanks for sharing your thoughts on the topic! I agree that in many of these situations it depends on what your goals are. Some people have goals that will require very little monthly income, so it makes increasing your income less important (unless you have early retirement goals).
Frugal Italian Family I think both are important as well, and we have certainly cut our expenses quite a bit the past few years. But once you’ve focused on cutting expenses and have a system down for how to keep them as low as you are comfortable with I think it’s time to shift your focus to making more money.
Jay at Thinking Wealthy DC @ Young Adult Money moneypropeller Jay we certainly think alike. My wife is getting her masters in counseling and we certainly plan on paying off ALL our student loans (grad and undergrad) before having kids. We would really like to sock away as much as possible, too. We’ll have kids in our 30s but for now just keep the money, education, and travel coming!
Interesting article, but I disagree…
For each additional dollar saved, you get 100% of that dollar.
For each additional dollar earned, you get 75% of that dollar (the government gets the rest).
A dollar saved > A dollar earned.
michaelk51 What about the taxes you had to pay on the dollar you saved. There is no way around taxes.
Gen Y Finance Guy michaelk51 This logic doesn’t take into consideration the fact that you can’t simply “save” an extra $50k a year. You could certainly earn an extra $50k a year. There’s only so many ways to cut costs.
DC @ Young Adult Money Gen Y Finance Guy michaelk51
No argument here. There is a floor to how much you can save, but there is no ceiling on how much you can earn.
I am totally with you DC.