Early Retirement, Finance

Spend Less or Earn More?

“For every choice you make, there is a consequence to face. Choose wisely!” 
― Kemi SogunleBeing Single: A State For The Fragile Heart: A Guide to Self-Love, Finding You and Purposeful Living


[ Day 56 of 2000 ]

Ideally, spend less and earn more!

Suppose you have to pick one. Let us pick concrete numbers to look at, say $1000.  Which one do you think would have more impact on your life – earning $1000 more a year or spending $1000 less each year? Is one better than the other?

Both of these will result in the same amount saved that year. So the magic of compounding is not going to help you differentiate. In case you are just generally aware of compound interest, and have never done a calculation, take a look at this:

I used the calculator from the first Google search result, here. If you don’t agree with my assumptions, you can use your own.

I didn’t mean to digress. Since compound interest doesn’t make a difference in this scenario, what does?

Value of your nest egg. For every $1,000 of your expenses, the amount you have to save up will go up by a lot more. If you buy into the 4% safe withdrawal rate(SWR), you have to save $25,000 for every $1,000 you spend. If you are more conservative and believe that SWR is actually lower(say, 3%), you have to save $33,333 for every $1,000 you spend. The difference between a $40,000 annual budget and a $60,000 one is huge – the nest egg needs to go up by an amount between $500,000 to $666,667.

That is a considerable chunk of money. It will take years to save up that much extra. Is it worth it?

“But I can reduce my expenses later!”

Can you? If it is not an expense that you can cut now, can you actually cut it later?

There are some, which you genuinely can. Like the cost of commute. Like the money you spend on professional clothes. And child care costs. But that about that weekly lawn mowing that you get done? The snow shoveling service? House keeping?

If you can do without any of these, go ahead and stop that. I am not saying that you should cut down on every expense. Evaluate each expense critically. Does it give you enough happiness that you will work for so many more months (if not years) to maintain that lifestyle?

I am guilty too. We get someone to stop by once in two weeks to clean up our house for us. It costs us $80 for each visit. Every time I write her a check, I feel bad. That is something I can do, but am opting to pay for. I genuinely hope that I will be able to cut that out once I retire.

Don’t let lifestle inflation to get you. We do that by allocating a fixed amount for expenses every month.

“But I hardly spend anything!”

I do agree that there are some people who do live frugally, and can genuinely not cut any more. If you are in that category, I salute you, and this post is not for you.

This is for the majority of you who think that you cannot cut out anymore expenses, but really can. I urge you to track your expenses, liabilities and assets. Not paying attention to it is not helping you in any way. I use Mint predominantly, and have also signed up for Personal Capital. Both of these are free for these use cases. I don’t have a preference for one over the other (yet. I am still playing around with Personal Capital and like it so far).

Every single expense counts. The $1000 I used as an example may look like a huge number, but that is just $20 a week. Do you honestly think you cannot save $20 this week? and the next? for the rest of this year?

Personal Anecdote. TL; DR

When I was in high school, it was very hard to get into an engineering college where the education was heavily subsidised by the government. (I did get in, my parents paid about $100 for my entire 4 years of college.) We had to attend an entrance exam and the first few hundreds would get in. Considering that tens of thousands of students took that exam, it was really hard.

The entrance exam was a bunch of multiple choice questions. If I remember right, you would have about 45 seconds to spend on each question.

Those days, I had a teacher who hated the noise we made by talking to each other, before the classes started. One day, he walked into the class annoyed by the sound, and made this calculation. Suppose you spend 5 minutes every day talking to your friend. If you could try and solve 3-5 practice problems in that time, and do that consistently for 2 years (average amount of time spent preparing for that exam), that alone would be about 2500+ practice problems. He announced that he would pay the fees for any student who did that and failed to get a rank good enough for a subsidized tuition.

It actually made me think. Every small thing adds up. That is what I think of every time I make a purchase that I don’t really want. Every thing adds up.

By the way, no one took him up on his offer. We were 17 year olds with no worries about our future and definitely prefered talking to our friends to preparing for an entrance exam a year or two away.

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About BusyMom

Mom, Software Engineer, Dreamer - Can't wait to be less busy! . Please leave me any feedback you can think of. I am still learning and anything you can tell me about making this blog better is very much appreciated. .
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12 thoughts on “Spend Less or Earn More?

  1. Sometimes there are those periods in life that you can justify spending more for your sanity! After having a kid and going back to my then hated full-time job, I was stressed and constantly sick. We did hire a cleaning person to help out with that once every 2 weeks and for that I was grateful. Then we moved, I got a new job I wasn’t working 60hrs/week at (down to 40hrs per week, hello free time!) and then I got into cleaning hacks. I keep cleaning supplies in every bathroom – windex, wipes, paper towels, etc) and hide them in a cute cupboard up high (out of reach of kids) and finding cleaning hacks simplifies a lot! And yes – we fight lifestyle creep at all costs! Interesting engineering story in school – good lesson that everything does add up!

    1. I agree. When we were in India, we had help for everything. When I came here, it was suddenly not affordable. Labor costs so much here. And then one day I reaized that it would really save my sanity. Once I don’t need the help that bad, I will stop it. I keep cleaning supplies everywhere too. It is easy when I don’t have to go and get it from another place.

  2. I love your personal anecdote! So funny and so true 😉 Speaking of saving more vs earning more – I think the simple wisdom that I read on MMM’s blogs prevails – for every permanent decrease in spending has double benefit, it increases the money you have to put in saving and lowers the amount you need to spend for the rest of your life. You could earn more and still be bankrupt/broke – lots of actors, athletes are examples of those. On the other hand, people who spend less end up being far ahead in the game.

  3. Definitely true! If you’ve read Slight Edge, the book highlights stories like your teacher one. He sounds like a cool teacher, who really cares about his students!

    Hindsight is always 20/20. So many people have given me advice, and I’ve definitely ignored a bunch of it, only to realize my mistake later.

    1. May be he was just really annoyed by the ruckus we were making. He did give me lots of nuggets like this – didn’t appreciate it then, but they make sense now.

  4. Hi Busy Mom, I like “spend less than you make and invest the rest”. I am horrible at budgeting but am good at keeping my expenses low and investing the rest. Your points are excellent with small amounts saved it accumulates up over months and years.

    1. I have found that they add up pretty quick.

      I am like you too. Haven’t got the budgeting part yet. But keeping expenses low is mostly not so hard. Key word: mostly 🙂

  5. Yes you’re right, the correct answer is “both”! If you can do both you will accelerate your timeline to FI. Many folks think they can’t earn more, and it can be hard with a full time job. But as we know there are now so many ways to earn more money online. Even if it’s only a thousand a year, as you clearly show, that compounds big-time!

    1. Yes, the magic of compounding.

      The first time I tried it out with some numbers, I was amazed. I knew the principles beforehand, I knew they it would grow a lot, I thought I knew everything. But seeing it with actual numbers was am experience.

  6. Hey! We use the same compounding calculator!!! Awww… 🙂

    Great words of wisdom here. If only they pushed the idea of compounding more when we were all a bit younger and easy going with our limited cash flow. Alas…

    Funny – I had similar support from my parents in college. About $0 contributed. Fortunately I had an okay part time job, worked summers, and stayed in state to help mitigate the student loan damage. Still, c’mon Mom and Dad!!!

    1. My parents didn’t have to – the government covered it all. And I got paid (by the government) to do my master’s, that covered all my expenses including tuition, boarding and food. In fact, my first job was after I finished grad school.

      Things are really different when you grow up outside USA. None of my friends or I have done any of the jobs that kids here seem to do. All expenses are taken care of by parents until you get a job (which you start looking for after your education). I was an exception in that they didn’t have to pay for my grad school. Why do you think there are so many Indian engineers around you? There are a lot more back at home 🙂

      That is one thing that makes me feel bad about not paying for GBoy’s college. I was raised there. Luckily, he is being raised here. And we will help some. Just not a lot.

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