In personal finance, there are really only two things you can do to improve your situation:
- increase your income
- reduce your expenses
But the bigger question is, which should you put your time and energy into?
I’m a firm believer you should be working on both if you want to see big improvements.
It may not be new information to some, but I think it’s worth it to explain in greater detail why this is.
One or the Other Doesn’t Work
We’ve all seen stories of lottery winners who’ve blown through the money in a matter of months. And most know a six-figure earner who is just a paycheck away from broke.
In isolation, having a big income isn’t the answer. It helps, but it’s not a 100% solution to true financial freedom.
“A fool and his money are soon parted.”
As people make more money, they tend to spend more money. Rarely do you find someone who continually upgrades their income and never spends more.
Likewise, there are limitations as to how much expense reduction can help you.
In fact, of the two, only expense reduction has an inherent limit.
You can only reduce your expenses to a certain level.
If you normally spend $2,500 a month, the most you can save by reducing expenses is $2,500 per month. You can’t spend less than $0. That’s your limit.
This is not a knock against frugality.
In fact, I think spending your money wisely and efficiently is a virtue, only mastered by a few. But if that’s the only area you focus on, then you are really limiting yourself.
Even if you have a decent income, your ability to build wealth is limited, and it will likely take you your entire career to reach financial freedom.
Focus on Expenses First
One benefit of working on your expenses: you can do it quickly.
You can literally slash expenses overnight. Canceling services, down-sizing vehicles, and other cost-cutting measures don’t take a lot of time or energy.
One day you could be spending like a drunken sailor, the next you could be living well within your means—the same can’t be said for the income side of things.
Therefore, if you’re just getting started with improving your financial situation, you should probably take a look at reducing your expenses first. It’s the low-hanging fruit.
Once you get your expenses reduced, start focusing on ways to increase your income.
I would argue once you reduce your expenses to a decent level, your time is better spent figuring out how to bring in more income versus discovering more ways to ratchet down expenses.
Focus on Growing Income Next
Unlike with expenses, you aren’t inherently limited when it comes to increasing your income. It may not happen quickly, but you can see unlimited increases to your income.
If you don’t have a career, get one by increasing your education. If you do, ask for a raise or change jobs to get one.
Some would argue career earnings still have you in the “slow lane” to financial freedom; a faster way to get there is available to those who are willing to risk time and energy on a business idea.
There’s no denying the unlimited income potential which comes from the holy grail of wealth creation: the small business.
Of course, not everyone who starts a small business is successful.
But I would argue small business owners have the quickest, most lucrative path to financial success. Entrepreneurial endeavors which have large demand (and can scale) have unlimited earning power.
Look at any successful personal finance blogger out there. How were they able to “get out of debt” or “save a million dollars” so quickly?
Not by only reducing expenses. They did it, mostly, by increasing their income from building a successful small business.