* This is a post which has been posted on gunther goes tax’ish on October 6, 2009 by the author *
Have you ever heard someone saying: “You shouldn’t focus too much on spending less! Just earn more, that’s way easier.” I agree. Especially if you think of the onerous task of changing your own financial behavior. Ahh… yes, it is a pain in the ass to change your spending pattern. But I don’t like the answer “earn more” to the question “What should I do to get my finances under control?”. Because this is not an adequate answer to the question. It just deliberately postpones actions in order to deal with this question. Once you earn more, you might have more disposable income to deal with your debt, bills and expenses but it doesn’t solve it. You’ll ask yourself the question at some later point in time again. For sure. So here are some reasons why you should focus on spending less, before considering earning more.
1. Earning more doesn’t teach you anything about personal finance. You might earn more and all your financial problems might seem to be solved at that point in time. But your own behavior doesn’t change. Sooner or later you will feel rich, buy some perks and spend your money on things you wouldn’t have spend on in the first place. You’ll enjoy some lifestyle inflation and sooner or later you’ll face the same problems. Thats also one reason why some lottery winners, who won millions, now live in debt. If you can’t control the 1$ you have now, you won’t be able control the millions once you have them. It’s fun to chit-chat with your friends or family about “What would you do if you win the lottery?” You think of incredibly stupid ways to spend that amount and just have fun. But after the fun is over, someone always says: “Ah, but seriously: I’ll spend X$ (often 20-25% of the winning amount you agreed upon) on XYZ (any perk, max. real estate) and on gifts to friends and family. I’ll invest the rest. Thats it”. If they don’t do this already, they won’t.
2. Earning more has higher costs. Depending on the tax bracket in which you’re in, earning an additional dollar might cost you more in terms of taxation. If your total income is within the bracket with linear progression (see post on marginal tax rates) every additional dollar in your income increases your average tax rate. You might earn 1$ more in gross income, but will pay ca. 40% tax on that, leaving you with 0.60$. On the other hand, savings arise from net income. 1$ saved = 1$ saved. I truly believe that saving 1$ is much easier than earning one additional dollar. Interestingly, I also believe that earning 10,000$ is easier than saving 10.000$. So there must be a turning point somewhere in between. But increasing your income by such an amount involves big changes in life. Maybe a new job or an additional income stream, which also requires a lot of effort to achieve. I am not saying that you shouldn’t take the chance to increase your income, but “earning more” is not the panacea in personal finance.
3. Controlling outflow is easier than inflow. Did you ever try to lose some weight? I bet you did. What did you do? Just increase the amount of exercise? Probably not. You probably put some effort in eating healthy food and restricted your calorie intake while going for a walk or training in the gym sometime. The same rules apply in personal finance. Balancing your inflow with your outflow is the only way to get your finances under control. You should know how difficult it is to burn the calories but you also know how easy it is to restrict the calorie intake. Burning a can of coke in the gym vs. not drinking the coke. What’s easier? I take the latter one, also in personal finance.
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