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For Financial Freedom: Reduce Expenses or Grow Income?

The frugal approach to growing wealth focuses on what you spend. The Millionaire Next Door, one of the most popular wealth motivation books, shows how spending wisely is the most important factor in increasing net worth. The book contains anecdote after anecdote about millionaires who live below their means and keep their wealth by maintaining modest spending patterns even when they have the financial capacity to spend more.

This philosophy is a necessity, particularly in the early stages of growing wealth. It’s limited. Whether you’re supporting a family of four or are living on your own, you can only reduce your expenses so far. Expense reduction can be taken very far — you can live off the land if you are willing to forgo the conveniences the modern middle class has come to accept as basic living conditions. If you’re not willing to go that far, you can feed your family a steady diet of ramen noodles.

There’s always further you can take frugality, but everyone has a limit. That limit might be flexible once a family concludes that frugality is the path to long-term wealth.

A frugal-only perspective to building wealth is not going to take anyone very far. Saving money is limited — whether by a soft limit in which a family has living standards below which it would not like to have an enduring experience or the hard limit of zero. You cannot reduce your spending by an amount larger than your total expenses.

If your total expenses consist of only the basics, food and shelter, and they amount to $1,000 a month, you can only reduce your spending or increase your savings by $1,000 a month, and to do that you would need to live rent-free with a kind soul and find free sustenance. And even then, you’ve saved only $1,000 a month and there’s nothing more you can do. This is an extreme example — most people have more they can save without resorting to mooching off others who understand your desires, but mathematics is not as forgiving.

The other side of the equation is just as important, and I would argue that it’s significantly more important. In these ten tips for saving money, half are about earning more money because increasing savings depends on having a healthy income more than it depends on cutting costs. The amount you can save by cutting spending is limited by nature, nurture, or logic.

In contrast to the limited approach of cutting expenses, earning more money is virtually limitless. While there comes a point at which saving more money is not possible or even desirable, there are always opportunities to earn more.

In the short time I was a non-exempt employee in the financial industry — eligible for overtime payments — I took advantage of this as much as possible. Working long hours in this job was expected and there was more than enough to do to keep me busy, so the situation was perfect. When I moved into a different department and received a promotion to exempt status, my first concern was that my new salary would be more than my previous salary plus overtime payments. Without the opportunity to earn more for working overtime, I had less control over my income from that job.

At this time I had already reduced my expenses significantly, and had little more possible without sacrificing some of my basic requirements for quality of living. I was on the quest to build wealth, however, and that included quickly eliminating my remaining student loan debt, so I focused on earning more money. I consulted for several clients who were interested in building their web presences, as this was a skill I had been developing for a long time. I put more focus into my business outside of the workday, and that help me use a variety of skills to increase my income. A few years later, this website began gaining in popularity among readers and high-quality advertisers, and it provided a surprisingly stable source of income above and beyond my salary from a day job.

The point I’m making is that there are always opportunities to grow income if you have the time to spend building something of value. While not everyone is suited to being an entrepreneur, those who build something that other people are interested in can ease the pressure on their expense rollbacks by generating a revenue stream. This is the key to building wealth in a manner that you just can’t imitate by cutting spending.

Getting rich slowly through smart spending and good choices is an important part of the wealth-building picture, but there’s not much use to wealth if it takes a lifetime to accumulate. Putting significant effort into creating something of value — a product customers will buy, something that fills a need previously unfilled or poorly filled, a business with the potential of being sold, or a service other people or businesses require — your day of financial freedom can arrive much sooner.

Photo: fireflythegreat

Published or updated September 28, 2012.

About the author

Luke Landes is the founder of shizennougyou. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 12 comments… read them below or add one }

avatar 1 Anonymous

I pretty much agree with Ramit’s philosophy on this. Concentrate on making more money and the few big wins when it comes to being frugal. It makes sense to expend effort to save $2000 negotiating a deal on a new car or refinancing your mortgage, but saving $3 per day by cutting out coffee probably isn’t going to make you rich. Unfortunately, the reality is that some people just can’t seem to save money regardless of how much they earn, so there’s definitely a place for the “you need a budget” crowd.

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avatar 2 Ceecee

As with many things, there needs to be a balance between cutting spending and increasing income. You are right, you can only reduce spending so much—–there are things you must have. I tend to lean too much toward cutting costs, and I’ve learned the hard way that income must also be increased to be able to save adequately.

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avatar 3 Anonymous

It is a difficult lesson for most of us to learn the extra couple of dollars we spend each day won’t add up as much as getting a part-time job or starting a business on the side. Earning more is definitely the way to go, while still remaining reasonably frugal.

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avatar 4 Anonymous

Totally agreed here. Though I am all about budgeting, and cutting out the crap that people waste so much of their money on, I do agree that it’s kind of a set it and forget it strategy. Once you have your budget in order, you should shift your focus on bring in one or more additional streams of income in.

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avatar 5 Anonymous

Like you said, you can only save so much money. The rest is about making more of it. How you do that – follow your passions.

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avatar 6 qixx

Take a look into Cal Newport’s (of Study Hacks) new book. It is about how follow your passion is bad advice. Still waiting on my copy so i can’t comment on the content in the book yet.

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avatar 7 Anonymous

Living on a fixed income (well, with an occassional COLA bump) makes budget control an essential part of everyday life. There is always the option of working in retirement but the inner voices keeps yelling “Have you lost your freaking mind, dude.” I know, I know, I really didn’t contribute to the subject did I … sorry!

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avatar 8 Anonymous

I have always been a saver and spend less than I earn. At some income levels, you need to add income because you cannot cut expenses any further. Therefore to answer your question, it depends on how much you earn.

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avatar 9 Anonymous

I have my expenses at an acceptable level but now I am focused on growing my income through side gig’s. My job seems pretty stable but my big promotion is 3 years away when a superior retires and myself and my boss move up.

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avatar 10 Anonymous

I’ve always WANTED to be the type that built up my income until I didn’t even have to watch what I was spending, but I think that it’s a joint effort – reduce expenses, AND grow income.

If you made $1M/year, and spent $1M/year on material goods, you wouldn’t reach financial freedom. You’d just have a lot of stuff. I guess it also depends on what the definition of financial freedom is!

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avatar 11 Anonymous

Lots of sensible stuff here – but maybe one more aspect to consider. You can invest NET income (income less expenditure) to produce FUTURE income – for example, for retirement. The more you bear down on expenditure now, the lower the income hurdle for your eventual retirement, i.e. the possibility of EARLY retirement. What is more (and this is from experience) those frugal habits mean that even in retirement you can continue to grow wealthier – and even afford some luxuries. You also give your kids a great example in money management.

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avatar 12 Anonymous

I think this article is missing a bigger point. That point is that it is important to find out what your expense threshold or–probably–thresholds, is. Those thresholds are the bare minimum you could really be okay on and your middle of the road point of expenses where you aren’t completely on budget lockdown, but also aren’t able to do everything you’d like to. That bare minimum point is important to know in case of disability, disaster, or just if you suddenly decide working sucks and want to know if you can retire now.

In that same vein, what is really important is your ratio of expenses to income. Having $30K/year of bare minimums (I include taxes in this number) with a $35K/year salary is a whole lot different than having a $30K/year minimum with a $100K salary, or even $50K/year minimum with a $100K salary. At first blush, this argument of mine seems to support the original author. But that is neglecting the very human and very prevalent tendency for this ratio to stay fixed in a household, even in light of income increases. Put another way, if a household casually falls into a ratio of 70% (say, 35K/year expenses on 50K income), then that household’s income jumps to $70K, it is very likely expenses will creep right up to $49K/year. Only through discipline and conscious effort (a la Millionaire Next Door) toward expenses, will that increase in income result entirely in additional savings.

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