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Earn More or Spend Less?

Why a habit of frugality is far more powerful than a bigger income

Earn More or Spend Less?

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Spending less money is one of the keys to achieving financial freedom.

There are differing opinions about whether Benjamin Franklin ever said, "A penny saved is a penny earned." Regardless of who actually said it, I think frugality is far more powerful than just earning more money. Let me explain.

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The purpose of money

Time on this planet is our most valuable and finite asset, and we all want to make the most of it. Money is simply a means to that end. Think of it as the stored energy that gives us the freedom to do with our lives whatever it is that will bring the most meaning and happiness. That may translate to more leisure time, family time or even volunteering time.

And there are two ways to get this financial freedom:

  • Earn more money.
  • Spend less money.

Certainly, people who reach financial independence do a combination of both, but spending less is more powerful because of the "Two T's" — taxes and time.

The simple math of the Two T's

Let's take an example of a 55-year-old woman. According to the Society of Actuaries, she can have a life expectancy of just under 30 more years. Let's also assume that she wants to retire in 10 years at age 65, and that a third of her earnings will go to taxes (federal and state income taxes and payroll taxes). Finally we will compare earning $10,000 a year more to spending $10,000 a year less, with both increasing at the rate of inflation.

If she makes $10,000 more a year and puts what's left after taxes into her savings, she will have $66,667 more in today's dollars when she wants to retire in 10 years. But if she learns to live on $10,000 a year less and continues to do so for the remainder of her life, she will have saved $300,000 more in today's dollars. That's because she spends $10,000 less for 30 years.

So in this example, spending less was 4.5 times more powerful than making more. Though that number can change based on current age, desired retirement date and life expectancy, spending less always has a greater impact than earning more. Or, to put it concisely, spending less buys us more time than making more will.

Wrapping it all up

Spending more money is not going to make you as happy as you think. Get off that hedonic treadmill of keeping up with the neighbors. Saving is not only good for your bottom line, but also for your health. The seven techniques to save more, which I outlined in an earlier column, can help you attain financial freedom, allowing you to pursue what you want with your life. What that should be, however, is beyond the scope of my columns.

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Allan Roth is the founder of Wealth Logic, an hourly based financial planning firm in Colorado Springs, Colo. He has taught investing and finance at universities and written for Money magazine, the Wall Street Journal and others. His contributions aren't meant to convey specific investment advice.