Increase income or reduce expenses? This used to be a common debate that I have. Many years ago, I would scrimp on things that I love, e.g. coffee. Spending $6 for a cup of coffee is a tad too luxurious at that time. I would choose to not spend this money and save. I could save up to almost $600 a year if I drink twice a week, every week. This is one of the ways I would reduce my expenses. I’ve never really thought to increase my income. I’m taught to be grateful and content with what I have, which is what I did for a long time.
Then I came across this post by Ramit Sethi. In it, he talks about how you should be focusing on big wins instead of small expenses of $6 lattes here and there. Buy that damn latte, he said. And that’s what I did.
At the same time, I shifted my focus how to increase my income. Read here to find out how I increase my income by 33% from $60,000 to $90,000 in 2 years time, without switching jobs. So instead of reducing your expenses to save $600 per year from not drinking lattes, I ended up earning an extra $30,000 a year, so that I can still buy my latte with a lot of change left.
When I translate these into an investment with compound interest of 5% for 10 years, It is rather significant. $600 x 10 years ^ 5% = $7,924.07. That is a gain of $1,924.07. Now let take $30,000 x 10 years ^ 5% = $396,203.61. That is a gain of $96,203.61! You can see that the more money you have, the more compounding gains you will make.
Having said that, it sounds like increasing income is the way to go. And remember income has no limits. You can make as much as you want, or as low as you want.
So which is it, increase income or reduce expenses? The answer to this is, it depends. If you are making $20,000 a year, and you have already reduce your spending to a measly $5000 a year, there is only so much that you can reduce until life become so uncomfortable with these money restrictions. Then perhaps it’s better to look into how to increase your income.
Now if you are from the other spectrum where you are making $200,000 a year, but your spending is at $201,000 a year, you are actually worse off than the first example. In this case, your problem is not with earning more, but rather how to spend less. Because it seems no matter how high your income goes, your spending will also increase.
The ideal situation would be a balance of both. Start by reducing your expenses. This is slightly easier and quicker to see the effect. Reduce your spending to a level that you are not depriving yourself of things that you love. We can do this with conscious spending. Next, you can shift your focus on increasing your income. This can be done by upskilling yourself so that you can switch industry and earn more, ask for a pay raise, or start a side hustle and more.
For me, maintaining a balance of both is what I have been doing these past couple of years. Even though I had an increase of $30,000 a year, my life style and expenses has not changed much from previously when I was earning $60,000. So these extra monies has been going into building my wealth, mainly into investments of stocks and REITs. This will generate another income (other than from my salary) with the dividends that I will receive. So at the moment, I’m enjoying my perfect cup of Joe. 🙂
