A Penny Saved is More Than a Penny Earned

I like debating false dichotomies. Black and white is more interesting than fifty shades of grey, right? So I really enjoy reading posts on whether we should devote our energy towards earning more or reducing our expenses. Yes, of course, the right answer is "both," but that's boring. Plus, we only have a finite number of hours and an equally finite amount of willpower to aim at behavior change. As anyone who creates a laundry list of new goals in January can tell you, spreading yourself too thin just results in broad failure. Like Joe Saul Sehy says, narrowing your focus to a small set of financial goals is the (only) way to success. So, if you have to choose between earning more and saving more, which way do you go?

All things being equal, a dollar of recurring-cost savings has more impact than a dollar of earnings. This is because recurring-cost savings can cut money out of your baseline spend forever, while no income can be guaranteed over the long haul. Traditional income from a paycheck must be earned and re-earned, and can change dramatically over time via a job loss or change in pay. If you're in sales, commissions are variable -- even long term customers may leave you without warning. Even truly passive income (e.g. - dividends) can't be counted on long term, or at least not with complete certainty. On the other hand, cutting out a recurring cost can save you money forever. When you cancel your cable bill, you've booked the impact of those savings for each and every month until you die (presuming you don't sign up for cable again). When you sell your second car in favor of riding a bike more often, you cut out gas, maintenance, and insurance expenses from your budget this year, and every year going forward.

Saving money is not particularly time intensive either, at least compared to what one typically would do to earn more income (a side hustle, second job, overtime at work, etc.). Some savings methods are time intensive too, of course: clipping coupons takes a while, and is a good way to get carpal tunnel. But a single call to your cell phone provider, and switching to an MVNO, can cut out ten or twenty grand of expenses in just a few minutes. Even one-time savings are more quickly achieved than one-off income. If I want to mow a neighbor's lawn for twenty bucks, finding one customer and mowing just one lawn takes a decent amount of time and effort. While all I have to do to prevent myself from buying a new riding lawnmower is to stay in my house, and not drive to Sears. Not buying things is easy, and takes no time at all: just don't go to the store.

The sneakier reason that a dollar of savings has a greater impact than a dollar of earnings is due to taxation. A dollar of income is usually subject to a number of taxes: federal and state income taxes, SSI, Medicaid, and, by the time you're done with what's left of that dollar, probably some sales tax, too. Even when ignoring the better long term impact of expense reductions, you need a lot more than a dollar (let's say at least an extra quarter) to have the net impact of a dollar saved.

Of course, there's a limit to achievable savings. You only have so many costs that you can, or would want to, cut out of your budget. And, yes, even though you will eventually be punitively taxed if you keep increasing your taxable income, there is no limit to the income you can earn. Still, I think it's prudent to first spend your time and effort on reducing expenses, because you'll get a greater impact, and you'll do so more quickly. It's more efficient to first spend your energy approaching your ideal level of spending, than it is trying to increase your income. Once you've cut down your budget to the right level, sure, spend some time and effort making more money if you want. Though if you cut out enough from your budget, my guess is that you'll find you already make enough, and would rather just keep your precious free time to yourself.


*Photo is from bradipo at Flickr Creative Commons.