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…