In our community of financially savvy people, you’d think that it would be easy to agree on certain things. Nothing is farther from the truth. Take for example the discussion on increasing income vs lowering expenses.
It seems we can’t agree on which is better. So to end the discussion once and for all, here is my take on it!
Increase the Gap
In the end, what we are trying to do is to increase the gap between income and expenses.
The gap is what we refer to as our savings, often expressed as a percentage and then called the savings rate. This savings rate indicates how soon you will be able to pull the plug and call yourself financially free.
You can increase the gap in two ways. The first is to increase your income. The second is to lower your expenses.
You can increase your income in a lot of different ways. My favourite one is to ask your boss for a raise. Seriously. Stop reading Fire The Boss if you’re not ready to ask for a raise. It’s not hard, your boss will not hate you for it. The worst that can happen is they say no and you go back to your job.
The second option is a little more rigorous. Let’s assume you talked to your boss about a raise and they kept saying no. But you know that your market value is more than what you earn now. Then apply for new jobs! It’s very nice to be job hunting when you still have a job. You have the option to say no and wait for the right opportunity because there’s nothing to lose!
Of course, there are more options to increase your income than just to get a raise at your job. You could start a side hustle for example. Side hustles can provide income besides your regular job, allowing you to work (and earn) as little or as much as you’d want.
Other ways to generate income are a little bit harder to get into but can be very rewarding once they’re up-and-running. You can think of writing books and getting royalties or creating mobile apps with an advertising or freemium business model behind it.
There are no limits to how much you can earn. Try to make the most out of your time, by getting paid what you’re worth!
Lowering your expenses is a sure way to increase the gap. There are plenty opportunities to spend less on almost everything, my favourite ones are these:
- Cheaper housing (rent a smaller home, refinance your mortgage, sell and move to cheaper home)
- Cheaper (or no) car
- Save on groceries by making meal plans and stop wasting food
- Save money by quitting subscriptions
Which savings you choose to pursue doesn’t matter. Lowering your expenses is a sure way to become financially independent really quickly! The reason is that this knife cuts both ways. By lowering your expenses, you’ll be able to save more and be independent quicker. Also, if you spend less, you need less capital to live on, which means you get there faster.
While lowering your expenses is not unlimited, it actually has a dual effect on your timeline to FI.
Which is Better?
So which of the two is better? What should you focus on?
Obviously, you can’t do everything at once. That means you have to focus on a few things and be good at them. You don’t have to choose between increasing your income and lowering your expenses, but you also can’t do all of the suggestions at once.
Lowering your expenses might be one of the best ways to start though. It works in two ways, which is great, however, there is limited potential here. Your expenses can’t go below zero.
On the income side of things, there really is no limit. Although chances are small, you could potentially build the next Amazon and build yourself a nice 140 billion dollar empire. Just make sure you don’t divorce during that time.
Your income potential is unlimited, that’s why I argue that focusing on income is more important than focusing on spending, at least once you have laid a solid base and aren’t spending too much on useless stuff.
Which one would you rather focus on? Where do you stand on increasing income vs lowering expenses?