Is it Better to Earn More Money or Spend Less?

If someone earns a million dollars a year, you may call them rich. But, if they also spend a million dollars a year, then they’re broke. So, ponder this, is it better to earn more money or spend less? Here’s why you may want to aim to be wealthy instead of rich.

wealthy

When you hear the words rich and wealthy, what comes to mind? If you’re like me, they probably conjure up different images. Rich, in my head, looks a bit like Scrooge McDuck swimming in his pile of money. Wealthy, on the other hand, looks to me like cultured people having a quiet evening on a yacht.

According to dictionary.com, the words are basically synonymous. Rich is defined as “having wealth or great possessions; abundantly supplied with resources, means, or funds; wealthy.”

In other words, there’s not much actual difference between these words. But in the world of personal finance, they’ve come to mean different things. And they also probably bring up different mental images for most of us in the Western world.

A brief Google search of personal finance writing shows how some people think about the differences between the words:

  • For some, rich people have a lot of money, but wealthy people can be relaxed about their money.
  • For others, rich people are showy with their money while wealthy people aren’t necessarily.
  • One person I saw thinks of rich people as coming up with their money in a variety of ways, whether through the lottery or their own earnings, while wealthy people work hard and invest wisely to build their wealth.
  • And some think about rich people as the kind who work harder to earn more money so they can spend more, while wealthy people work harder to be frugal so they don’t have to work as hard.

Regardless of how you think about it, one thing is true: we talk about “building wealth,” but we don’t use the word rich the same way. So even though the dictionary says they’re the same, we really don’t treat the words exactly the same.

So before we move on, let’s create a working definition of rich versus wealthy. And then we can talk about why you want to be the latter, not the former.

Related: How to Become a Millionaire in 5 Simple Steps

Rich vs. Wealthy: A Working Definition

Let’s agree that for the purposes of this article, rich versus wealthy are defined similarly as above. Rich people have a lot of money and may have a showier lifestyle that they have to work hard to maintain. Wealthy people, whether they have a lot of money or not a ton, manage their resources well so they don’t have to worry about money constantly.

So wealthy people are likely to be of the millionaire next door type. They’ve accumulated wealth and don’t worry about money, but they may not look all that rich. That’s probably because they’ve consciously decided to live below their means. If those means happen to be great, maybe they look richer than your average American, but you can bet wealthy people aren’t mortgaged to the hilt and living paycheck to paycheck.

Related: 35 Resources to Help You Live Within Your Means

Wealthy people also tend to have opportunities to make decisions that are great for them. Maybe they can afford to take a pay cut for a job they love. Or they can drive older cars so they can take great vacations. Or maybe they are able to save for their kids’ college so their kids can go through school debt free.

The reality is that while there are lots of rich people out there making bank and spending loads of money, there are fewer wealthy people who are truly secure financially. But maybe you’d like to be one of those people. How do you get there? Here are some steps you can take:

The Path to Building Wealth

What it takes to build wealth shouldn’t come as a huge surprise if you’ve spend any time here on this site. We talk about it a lot. Some of the writers are even working to build enough wealth to retire ten or more years early! But if you need a primer on building wealth, here are the basic steps you should take:

Get on a Budget

The first step towards financial freedom is to both know what you’re spending and keep it under control. That’s basically what a budget does. When you hear budget, you might think it means never having fun or spending money again. But that’s not the case.

Related: 10 Online Budget Tools

A good budget starts by simply observing what you already are spending on a regular basis. Once you see how you’re actually spending your money, you can spend some time thinking about where you might need to rein that spending in. And that’s where you create a budget.

You can be super detailed with your budgeting using tools like YNAB and Mint.com. Or if you really only overspend in a couple of key areas, you can create a super basic budget in a spreadsheet or just on a piece of paper. The key here is to figure out what works best for you as you create your budget.

Figuring out what you already are spending can take a month or two of tracking your expenses. And then creating the right budget and sticking to it can take a few more months. So don’t expect major changes in your finances immediately. But as you learn to be more aware of what you’re spending, you can make more conscious decisions with your money. And that’s one of the keys to living wealthy.

Trim Your Expenses

Once you’ve settled into your new budget, it’s time to give that budget a hard look. This is essential if you’re in debt or are living paycheck to paycheck. Debts and on-the-verge financial living are no way to build wealth. So if you’re in those situations, it’s time to figure out where you can cut back.

This might look like a major cut back, like getting rid of your $200 per month cable subscription or selling your car for a much older, paid-off model. Or it could look like trimming expenses in smaller ways that will add up. The Latte Factor is the idea that small expenses can really add up, having an outsized effect on your financial goals.

One thing to note here: don’t try to cut back everywhere all at once. If you have big savings goals, you might be able to really restrict your budget to reach them quickly. But if you try to get there immediately, you may be able to sustain the restrictions for just a few months before you explode and spend all the money. Remember, slow and steady wins the race!

Pay Off Your Debts

As you start trimming down your expenses, put that money towards any debts you have, especially high-interest debts like credit cards. There’s a lot of debate in the financial world about how hard you should hit getting out of debt. Generally, though, if you’re paying hefty interest, it’s better to pay off the debt as soon as possible.

Those monthly payments can be restrictive to your budget, and you probably can’t out-earn that interest by investing the same money. But once you get down towards your lower-interest debts, like your student loans or mortgage, you may want to slow down your debt payoff plan in favor of investing more of your money to continue building wealth.

Related: DR Podcast 298: Paying Off Debt vs. Investing

Invest

Either after you pay off debts, or more likely while you’re doing that, you should invest some of your money. You might start small, investing a couple hundred dollars per month through your employer’s 401(k) plan.

Resource: Blooom Review – Finally, a Robo-Advisor for Your 401(k)

Unless you’re saving for something specific, like a car or home, it’s usually best to focus on your tax-advantaged investing options first. If you max out those options, you can then focus on investing in non-tax-advantaged accounts.

Investing can get complicated, especially as you accumulate wealth or have more money to invest each month. But it doesn’t have to begin that way. When you’re just starting out, look at investing with low-fee robo advisor services like Betterment. These services let you set up your investing profile and forget it, except to continue depositing money each month. They can make it much simpler for you to start investing without the overwhelm or hefty expense of an individual advisor. Once you get the hang of it, you can always become more autonomous in making your investing choices.

Make Conscious Financial Choices

As we’ve noted, being wealthy is really about being good at managing your money, how ever much or little of it you might have. Even on a modest income, if you can live below your means, you’ll feel wealthy and free with your money. And even on a huge income, you can feel broke all the time if you spend more than you make.

To continue building wealth, you simply need to follow these steps and keep making conscious financial decisions. That doesn’t mean you never spend any money or have fun with what money can buy. But it does mean that if you want to travel big, for instance, you might always drive older, paid-off cars so you can free up travel funds. Or if you want to send your kids to college debt-free, you live in a modest home, even if you could technically afford a bigger one.

In short, rather than always doing what you can technically afford to do, you make financial decisions that make sense for your values and financial situation. And you get to a place where you’re at peace with your money, knowing that you’ve got it under control and are able to move your life in a direction that makes sense for you.

Topics: debtMoney and LifePersonal FinanceSmart Spendingwealth

3 Responses to “Is it Better to Earn More Money or Spend Less?”

  1. Common question that divides the financial group into different sides. Some says it is better to earn more and invest a portion of your earnings for future use, while some believes that in an era of economic crisis it is difficult to earn more so you better spend less. I think if you can work on the two, earn more while spending less, it would be great. Just my two cents but I think it is very achievable and practical.

  2. Interesting article Henry. I’ll always pick “Earn More”, but doesn’t mean that I have to work more.

    You simply have to know how to leverage the time and efforts of others with a home business.

    And minimize your taxes with home business tax deductions to save you thousands every year, which increases your cashflow to fund your lifestyle.

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