Spend Less or Earn More?

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

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.