Pretty much everyone who writes anything about personal finance will agree that the best way to get ahead financially is to increase the difference between what you earn and what you spend.
There are, of course, two major ways to make that happen. You can either earn more or you can spend less. No matter which you choose, you’re increasing that gap.
Each angle has particular advantages and disadvantages.
For starters, spending less can have immediate impact on your finances. You can simply stop spending money right now and that money will stay in your checking account, directly building up your net worth. In terms of immediate results, there is no method of “earning more” that can top it.
The big drawback of spending less is that there’s only so much juice you can squeeze from that fruit. Eventually, you reach a point where it’s deeply uncomfortable (or impossible) to spend less than you’re spending and further efforts just have diminishing returns. Once you take care of the ten biggest ways to reduce your energy consumption, you start looking at progressively smaller returns.
On the flip side, earning more almost never brings about immediate financial change. You have to find a job and work for a week or two or put in the time to launch a small business before the money starts flowing into your coffers – or you might have to invest years in education to see a major jump in your income.
However, earning more has a giant advantage – it essentially does not have a cap. You can always earn more. You can always double your income with enough effort, enough good choices, and enough luck.
The solution here is pretty obvious. Frugality helps a lot when you’re facing an immediate financial disaster. When you’re struggling to pay your bills, finding ways to cut back hard on your spending can make the difference as to whether or not you can make it to your next paycheck. Frugality can push your head above water so that you can breathe again.
When you’re financially stable, though, it makes more sense to seek more income. Once you’ve reached a point where your bills are caught up and you’re not spending every single dime you bring in, your efforts are going to be better spent increasing your income by getting another job, building your skills, or starting a side business.
When exactly does that transition happen, though? When does it make more sense to slow down the focus on frugality and speed up the focus on improving your income? The guidelines above make a lot of sense and are generally agreed upon, but the exact point of transition is one that people will often argue about and disagree on.
My solution is simple: you should stick with frugality until the “time value” of frugality is worse than the time value of your current job.
Let’s dig into what I mean.
The Time Value of Your Job
How much money do you actually bring into your life for each hour spent on tasks related to your current job?
On one side of this equation is your income, but from that you need to subtract your costs – the commute, meals, travel, clothing, and taxes. On the other side is your hours spent at work plus the time spent commuting and the time doing job-related tasks outside of work.
Let’s say you make $15 an hour working at Home Depot. You work there seven hours a day, five days a week. However, they take 10% of your income away in taxes, plus you spend half an hour commuting to work each day and that costs you $5 in gas and other expenses.
So, in a given week, you’ll earn $525 over the course of 35 hours at work, but you’re losing $52.50 in taxes, $25 in gas, and spending 2.5 hours more to commute. Thus, you’re actually bringing home $11.93 per hour spent on work tasks.
That’s the number you should focus on when thinking about frugality. Ideally, you will want to take on additional work that will earn money at that rate or invest time into something (like schooling) that will help you earn a higher rate.
So, what about frugality?