Lending Club Blog

Raising Income Rather Than Lowering Expenses

The two ways to live within your means are spending less than you earn or earning more than you spend. While those two methods would have the same result, they come about from two different philosophies. Since we often look at things from the first point of view, I though it would be insightful to consider the opposing view.

The rationale behind earning more than you spend, rather than spending less than you earn, is two-fold. First, there is only a finite amount by which your current expenses can be reduced. The maximum amount is the total of all of your discretionary spending. While this could be a significant amount of money if you are a big spender, it still has an upper bound. If you want your net cash flow to improve by more than you can possibly cut expenses, increasing income is the only alternative. Second, reducing spending may lower your standard of living. Some cutbacks might not affect your standard of living, but many will. Higher income with the same expenses will allow you to maintain your standard of living and increase your savings or reduce your debt.

While spending less is certainly something I advocate, eventually earning more may be an easier solution. This point was discussed by Steve over at mywifequitherjob.com in his post Why You Should Worry About Your Topline More Than Your Bottom Line. He calculated that additional cuts to spending could save them at most $1,500 a month. Instead, he looked for ways to generate more money per month. If he could earn another $1,500, the net change to their cash flow would be the same, but without the work or sacrifices of cutting expenses.

Earning more is a viable solution, but it can also mask laziness and poor financial habits. A mixed approach may be best. Start by cutting back frivolous spending or purchases that you won’t miss. As further cuts become more painful, transition your focus towards earning more. While you can only lower your expenses so far, there’s no limit to the amount of money you can earn.

Is making additional cuts to your expenses more difficult than finding ways to earn more money?

Friday, December 26th, 2008 at 6:44 am

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