I have a question for you: if your goal was to become financially independent, would you get there by saving more money or earning more money?
You, my friend, have stumbled upon an age-old debate in the personal finance world.
On the one side, you have the frugality experts, like the Frugalwoods and Mr. Money Mustache, who argue every dollar saved is a dollar earned.
On the other hand, you have the “make more money” experts like Ramit Sethi and Financial Samurai, who argue that you shouldn’t waste your energy stressing over pennies, when you could be putting that same effort into making sure your earnings vastly outpace your spending.
So who’s right? Which approach is better?
Today, we’re going to examine both approaches, saving more vs earning more, and figure out which is better for building wealth.
So, if these seemingly opposite approaches have you scratching your head, stick around because we’re about to get some answers.
The Frugality Approach
Before we begin, let me clarify that I’m a huge fan of all four of the financial independence experts I mentioned in the intro. I’ve read a ton of their content and heartily recommend you do the same.
But there’s no denying that they have very different views on how to build wealth.
Let’s start with the frugality approach.
The argument in this camp is that we spend way more money than we need to, especially on things that serve a basic purpose.
For example, why spend $50k on a souped-up SUV when a $10k used Honda Fit achieves the same primary outcome, which is to get you from Point A to Point B. The marginal benefit of a newer car with a bigger engine doesn’t make up for the $40k difference in price.
If you instead saved that $40k and invested it in broad, market tracking, low-fee index funds, you’d stand a good chance of doubling your savings to $80k in 10 years, while still enjoying the benefits of a car, rather than losing $30k in the gradual depreciation of the brand new car.
In other words, by sticking to the essentials and not wasting money on overpriced luxuries that don’t provide us true happiness, we’ll get rich by investing all the savings from our comparatively frugal, yet still comfortable, lifestyle.
I have to say, it’s a pretty compelling argument. Particularly once you discover that this approach also has a wonderful bonus effect of teaching you how to derive pleasure from things that don’t cost money, like going for hikes, socializing with friends, and learning how to code.
This approach also teaches you about the importance of defining “enough”, which prevents you from blindly chasing money and insulates you from the dangerous snowball of lifestyle inflation.
The Money Making Approach
Now let’s look at the “make more money” approach.
These folks argue that frugality is unnecessary. By making more money, you can pay for all your luxuries, and simultaneously amass wealth by ensuring your earnings continue to exceed your spending.
Returning to the car example, if you can increase your earnings by $80k through bonuses, promotions, or side-hustles, then you can happily spend $50k on that fully loaded SUV and still have an extra $40k to dump into your brokerage account.
Sure, spending $4 on a latte every day equates to tens of thousands of dollars in losses over your lifetime. But who cares when your income growth vastly outpaces those costs?
As the Brits say, why not have your cake and eat it too?
Well shucks. This sounds pretty darn compelling. Dare I say, even more compelling than the frugality approach?
It does come with a few caveats though.
Comparing the Pros and Cons
First, you need to be able to make that extra money. It doesn’t come from nowhere.
Making more money requires time, hard work, and smarts. In fact, that sounds a lot like the same skills you need for frugality.
In other words, making more money isn’t necessarily a shortcut approach. Nor is it any easier. You could actually argue that it’s harder, because spending less money is something that’s entirely in your control, whereas making more money involves other people, be they bosses or customers, deciding you deserve to be paid more.
The other risk with the money making approach is that the pursuit of money can become an obsession.
Unless you set clear parameters in terms of time you dedicate to making money vs time you dedicate to keeping yourself mentally and physically healthy, you run the risk of burning yourself out and becoming yet another unhappy rich person, of which there are many.
For this reason, if you choose the money making approach, you still need to be very disciplined about how you go about doing it. Maintain a strict code of ethics and commit to embarking on your money making journey in a healthy, sustainable way.
My Personal Approach
Now, at this point you might be wondering where I stand on the spectrum. Or maybe you aren’t. But I’m going to tell you anyway.
If there were a wealth building color spectrum, from yellow to red, with frugality on the yellow end, and money making on the red end, I would say I’m a deep orange.
In other words, on the frugality side, I do believe it’s crucial to be strategic with your spending.
I try very hard to not spend more than I need to, and I’m constantly on the lookout for ways to save money on the essentials, particularly when it comes to recurring costs. I also believe that it’s important to appreciate what we have, rather than lust after what we don’t have.
So that’s the yellow part of my orange.
But like I said, I’m a deep orange, meaning there’s more red than yellow in my approach.
The primary reason for this is that the frugality approach is a defensive approach. Your focus is on preserving what you already have, rather than growing the pie.
This means you’re trying to protect a finite resource, and if something happens that depletes your resources unexpectedly, such as getting fired or surprise medical expenses, you don’t have much in your toolkit to protect yourself.
That’s stressful.
By contrast, making money is an offensive approach, rather than a defensive one.
When your focus is on making money, you’re continuously growing your pool of resources. It’s effectively infinite. This means that when something unexpected happens that depletes your resources, you have a clear path to recovery.
So, for those reasons, I like the resiliency that the money making approach provides. It feels like a more robust and durable strategy that can better weather the unpredictable aspects of life.
But even so, it’s important to still implement aspects of the frugality approach to ensure that money making doesn’t consume your life at the expense of the things that make you happy and healthy.
