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Friday, December 28, 2012

Increase income or reduce spending?

There are two schools of thought when it comes to financial independence.

One advocates increasing income, and argues that saving is pointless without income, and extreme frugality is no way to live. They advocate attaining financial independence through drastically increasing your income.

The other side says that while increasing income is good, it is not always possible, especially in this economy, and that no matter what your income FI can be attained by spending significantly less than you make.

So which is correct? is one tactic better than the other? Well, if you have read my first post, The Money Monk Method, then you know I think you can do both. It is a false dilemma for anyone to assume you have to choose one or the other. In fact, I think you would be a total moron to NOT actively utilize BOTH techniques, because there are benefits and limitations to each.

Increasing income is a super powerful tool for financial independence. In fact, income is the cornerstone of the entire plan. You HAVE to have an income of some sort to be able to save anything, no matter how low your expenditures are. So income can't be ignored. And adding income allows you to increase your savings even without changing your spending habits. Additionally, frugality has a floor (You can't spend less than 0, you are always going to be spending something) while income has no upper limit. No matter what you are making there is always technically the possibility to make more.

The limitation in increasing income is that, while it is always technically possible, it is not always practically possible, at least not for everyone. You don't just 'decide' to start making more money. It usually takes a lot of work, and there is often risk involved. People who are already low income may not be able to afford to risk much of anything. Other people just simply won't have the physical ability or knowledge necessary to make income increases happen in any significant way. The "increase your income' cheerleaders try to sell this idea that if anybody gets fired up enough about making money you can be rich, but that just isn't always the case, so you can't rely completely on trying to increase income if you really want FI.

Frugality has one thing going for it. ANYBODY can use it to gain FI. Almost no matter what you make, you can spend less. It won't be fun, but it can be done. And the thing about spending less than you make is that you will eventually gain FI. Guaranteed. How much you save will drastically affect how long it takes you to get there, but spending less than you make WILL work. EVERY TIME.

The downsides are that it can be very hard if you don't make very much. For some income levels it would require things like living in a van.

This is why I recommend using BOTH methods to maximize your opportunity to reach FI. But don't let people talk you out of being frugal, it is totally necessary, at least until AFTER you manage to drastically increase your income. And you should be aggressively working to make that happen. but until it does, do what you know works - spend less than you make!

-The Money Monk

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