Here’s a hypothetical personal finance question for you: Would you rather work more hours to support a lavish lifestyle, or adopt a more frugal lifestyle that requires less time trying to make money? Granted, there could be many things to consider when coming to an answer for a philosophical question like this. But if you approach it from a very basic standpoint, the answer can really tell you a lot about your outlook on life, spending habits and financial goals.
There are two primary ways to make a budget work. Either you cut your expenses to make things fit, or you have to generate more income to cover your spending. While everyone wants to make more money, not everyone can–or in some cases, even want to–put in the extra work that it may take. Depending on your situation and your personal preference, one option usually looks better than the other.
Earning More Money
A high household income doesn’t just mean a better standard of living and quality of life. In our society, it also equates to higher status and prestige. So that family that makes $250,000 a year but is up to their neck in debt still looks better than the family making $50,000 but has sufficient savings for retirement and college funds. Which position would you rather be in?
- Advantage: Making more money means you’re more able to afford things that you need and want. Budgeting helps you maximize your income. So the higher your income is, the more you can get out of your financial plan.
- Disadvantage: There’s not an obvious drawback to earning extra cash, but if you’re working 20-hour days to do it, you may need to re-evaluate a few things. Also, a high salary doesn’t necessarily equate to wealth. If you fall victim to lifestyle inflation, you’ll find yourself chasing more income and it never being enough.
Going beyond pure personal finance, it seems that the correlation between money and happiness on an everyday-basis plateaus when people earn an annual income of $75,000. Beyond that, your day-to-day happiness doesn’t necessarily rise but your overall satisfaction of where your life is going does. So, there’s that.
Spending Less Money
What good is making money if you can’t keep it? That’s the argument that you can make for why cutting expenses is more important than increasing your household revenue. If you’re stuck living paycheck-to-paycheck, it’s not going to do much good making those paychecks fatter if you can’t get yourself out of that mentality. High income doesn’t necessarily translate to being wealthy. You need to be able to retain some of that cash flow in a savings account or other assets.
- Advantage: A lean, mean budget means more efficient use of your money, which translates to not having to work as hard to support your lifestyle. Making little adjustments here and there can equate to savings that builds on itself.
- Disadvantage: Taken to the extreme, a frugal lifestyle can turn a reasonable person into a cheapskate. If you’re too focused on pinching pennies, the line between stretching a dollar and being flat out stingy can get blurred. You also don’t want to get so caught up clipping coupons that you lose your ambition for a greater calling in life.
A well-balanced financial plan involves managing both your bottom line and top line. You need to spend less than you earn in order to save, but that also means you have to earn something to begin with. Where you put that emphasis is up to you, though. So, with that said, would you rather earn more or spend less?
This guest post was written by Henry Truc from Go Banking Rates, a website that brings you informative personal finance content and helpful tools, as well as the best interest rates on financial services nationwide. Follow them on Twitter at @GoBankingRates.