I have always said that when it comes to choosing between earning more or spending less, I am on the earn more side for a variety of reasons, which boil down to two points:
- You can always make more. If you have two arms and a sane mind, there are no excuses. You can make the time by stopping watching TV. You can make money during your three hour commute by working online. You can make money on top of your college class load, at night and on weekends if you stop partying so much. And if your side hustle works out, you can make a career out of it. There is no limit to how much you can earn if you put the necessary effort to get there.
- You can’t always spend less. When you are down to a survival budget, when you have downsized your home, stopped eating out and buying new clothes, removed life’s every little pleasures, you can’t spend less without starving or living under a bridge. And while it is ok to live on a survival budget for a few month or even a few years while you pay off debt, life is meant to be enjoyed, and you will want to spend more eventually.
So when should you focus on spending less more than earning more?
When you are close to retirement. You earning days are counted, but your life expectancy is getting higher. Let me explain:
Say you are 55, and you have 10 more years to work. Making £10,000 more per year would be really nice indeed, and would help you bump your retirement nest egg by £100,000 by the time you hit 65.
Now instead of trying to make more, when you are 55, you try to live on £10,000 LESS than what you used to. Since there is a good chance you will live until age 85, you will not be spending those £10,000 just for the 10 years you have until retirement, but for the next 30 years. That is £300,000 you don’t need to take from your retirement nest egg.
And the only case I can think of when spending less really trumps earning more. That said, both can be achieved at the same time, since frugal habits don’t prevent you from doing your job well and trying to get that £10,000 raise. But if you are close to retirement and have little money saved, the best you can do for yourself is drastically change your habits and try to live on less to make your retirement money stretch farther.
Furthermore, for as much as you may hope to be able to work until you are 65, it might not be the case. Your company may get rid of you to hire a younger, more energetic substitute, and no one will hire you so close to retirement. You may get a work injury, or some kind of permanent disability that would prevent you from working. You may have to take some time off work to take care of a dying parent or spouse.
If you have £100,000 saved for retirement but need £50,000 a year to live comfortably, your savings will disappear in two years. However, if you are able to live on £1,000 a month, you have over 8 years of living expenses saved. Ideally, you need 25 years of living expenses saved, to live on a safe withdrawal of 4% of your savings. That means a £300,000 nest egg if you need £1,000 a month to retire. £300,000 is pretty easy to achieve over a 40 year career, but finding £1,500,000 to be able to retire on £5,000 a month is more complicated, especially if you are starting to worry about retirement in your late 40s or 50s.
Sure you can make it work with less money, as you can start digging into the nest egg more aggressively as you get older, and leave close to nothing behind. But you really want to be on the safe side, in case you live 100 years. Unless you’d like to have to go back to work in your 90s…
“When you are close to retirement.”
I disagree with this advice. The time to focus on spending less is NOW. A pay rise only lasts until you get a pay cut, get fired, resign or die. Reduced spending lasts forever and is in many ways like increasing your earnings anyway.
Under The Money Tree recently posted..I’m An Addict
I think one has to focus on both and I know it sounds hard, but it’s vital.
Don’t buy a thing you don’t really need, try to save as much as possible and try to re-invest it, so that you make more.
I don’t like being single-sided, so this is why my way is to do both ways.
As a fellow making money beats frugality kind-of-guy, I agree. You definitely don’t want to go back to work at 90!
Joe Saul-Sehy recently posted..Even Disney Bails Out Deadbeats (But You Should Dump Financial Fantasyland)
Good point! Rather than earn more in your last few working years, you’re better off preparing to spend less once you hit retirement. Earning $100k in your last working year pales in comparison to learning how to save even $15k per year during retirement. Assuming you live at least 7-ish years.
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Great post! It’s awesome information about this Spending less is more important than earning more. I’m waiting for this article and I learned and many great insights here. This will very helpful and useful for us. I will definitely share this to my friends. Thanks for sharing this article.-
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Smart advice, Pauline. People closer to retirement often think they can’t spend less, but it can be done with some education and effort, and often is a lot easier at those ages to be done than earning more.
Laurie @thefrugalfarmer recently posted..The Benefits of Long-Term Food Storage and Preparedness
You outlined a very strong argument for focusing on your earning potential instead of reducing spending. I totally agree whilst it is important to get a handle on your spending there is only so much that you can cut back on before you reach saturation point.
If you look at the UK economy right now this same principle is currently in process in that so much has been cut back it’s difficult to go much further. However as you rightly point out your earning potential is limitless and wholly dependent on your skills, abilities, determination and motivation.
Thanks for a well argued and concise blog post. It’s my first visit to your blog and I’ve already bookmarked it!
This is very good advice. I financially educated people should always opt to earn money over saving money, but people who don’t have a clue about how to manage their finances need to focus of their spending first. That’s the only issue I have with saying earn more over spend less. It puts people in the mindset that as long as they earn more, they can spend what they want. So again, I think earning more is better financially, but spending less is a good starting point for newbies to finances.
Spending less isn’t only a must when you’re nearing retirement. It can also be a great way to live life especially when you’re trying to work out your finances. It’s easier to earn more than spend less. It takes a lot of discipline and hard work to be able to cut down one’s expenses.