Saving money is the key to wealth creation. You do it, so you can buy investments that will grow and allow you to reach your financial goals!
The 2 ways you can save more money are by either increasing your income or lowering your monthly expenses. Most people believe that if they could just make more money, then they’d be able to become rich and wealthy.
But, according to an article on CNBC, this isn’t true. A survey found that almost one-third of American employees earning $100,000 per year live paycheck to paycheck. Even more surprising, this percentage is higher for those earning over $200,000!
This data shows that for many people, increasing their income won’t help them get ahead. In some instances, it leads to extreme lifestyle creep which only makes their problems worse. As their income grows, they spend and borrow more money which handcuffs them to their job and affects their ability to save.
On your journey to financial freedom, you should focus on lowering your monthly expenses, first. Not making more money. Here are 5 reasons why.
To a degree, you are in charge of the amount of money you spend each month. Sure, you have basic financial needs that you must meet to survive and wants that help you be comfortable. But, once these get met, then it’s up to you to choose what you’ll do with the rest.
At some point, as you continue spending and consuming, you experience the Law of Diminishing Marginal Utility. This Economic Law states that as you buy more of a product, you receive less and less satisfaction from it.
The alternative way to save more is to spend less. This option limits the effects from the Law of Dimishing Marginal Utility and allows you to put money towards something more meaningful that will provide you with a greater degree of happiness, such as building a cash runway so you can chase your dreams!
Most employees have less control over their monthly income than they think. They’ve put their entire ability to earn money into one basket and are solely reliant on their company’s performance.
Don’t believe me? Ask anyone who’s been downsized, laid off, or gone through a business realignment. Your income can be here one minute and gone the next!
We’ve already covered that you have control over your monthly expenses. So, if you can control the amount you spend, then you can see the results of consuming less, immediately!
For most people, the longer it takes to see results, the less likely they’ll be to stick with the changes they’ve made. They’re unwilling to wait and see if the effort they’re making will produce the outcome they want.
But, when you see results right away, you know your actions are working. You recognize the benefit of budgeting and lowering your monthly expenses because you can see more savings today! Contrary to popular belief, it’s not something that takes months or years to happen.
Whereas, it takes time to boost your income. You can spend months or years proving your true worth to your boss, gaining traction for your side hustle, or learning to invest in assets like real estate before you make more money. This future income is not guaranteed either. But the money you save today is!
In a matter of minutes, you can adjust your budget and lower the amount of money you spend. Often, these savings can get carried forward for months or years into the future, too!
For example, imagine you called your cable company, cell phone provider, and insurer and negotiated these bills down by $250 per month. What would happen if you took these savings and invested them?
Assuming you could earn an 8% rate of return, in 20 years you’d have over $137,000. This is money that can help you spend time with your loved ones sooner, retire earlier, or fulfill your dreams faster!
Unfortunately, many people won’t choose to lower their monthly expenses. Instead, they’ll put off saving until they earn more. This delay reduces the power of compounding and forces them to work longer.
Humans can’t work forever. At some point, you’ll get tired, bored, or replaced. It’s not a matter of if, but when.
Saving and investing today allows your money to work, so you don’t have to!
When you earn money, you pay taxes. And when you earn more money, guess what? You pay more taxes!
But, the money you’ve already made, has already been taxed. So, if you lower your monthly expenses, you get to keep 100% of the reduction!
For example, imagine you have the option of cutting your monthly expenses by $500 or earning $500 more at work. The money you’ve earned before the raise has already been taxed, so you’d keep 100% of the spending cut. But, if you earn $500 more, then some percentage of it goes to pay taxes and leaves you with a lesser amount!
Many people spend in proportion to the amount they make. As they make more, they spend more, and often these purchases are made strictly out of habit.
When you cut your monthly spending, you’ll stop buying things that provide little value. By removing the monthly expenses that no longer serve you, you’ll have the ability to redirect these funds to a place that will be a better use of money and add a greater degree of joy to your life!
If you are unsure of which monthly expenses are most important to you, I recommend trying experimental spending. Start by reducing your expenses down to a bare-bones budget and slowly start spending again in different areas. See how each area makes you feel. If they make you happy, then it’s important. But if they don’t, stop and find ways to cut or eliminate them altogether!
Try consuming at various levels, too. As you buy more, do you experience greater joy or less?
Either way, through trial and error you’ll discover what’s important. You’ll find ways to stop wasting money and that will allow you to save!
When you reduce your monthly expenses, you build financial discipline, too. You learn to live below your means and be frugal which are two money skills that you can take with you as you earn more.
Lowering your monthly expenses is one way to save more money. The other is increasing your income. Reduce your burn rate first and then focus on making more money.
When you do both together, you’ll maximize your savings. You’ll have more money to invest and grow which allows you to live free and fulfill your dreams, faster!
Do you think it’s better to lower your monthly expenses or earn more money, first? Comment below.
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