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?
The Time Value of Frugality
If you’re in the situation described above, you’re really only going to want to focus on frugality projects that earn you more than $11.93 per hour. (This is, of course, assuming that your head is enough above water that you can actually pay your bills – if not, you need to focus extremely hard on saving money until you reach that point.)
How do you know how much something will save, though? You need to be able to do quick back-of-the-envelope math and be able to estimate things pretty quickly.
For example, how much will preparing a meal plan and writing a grocery list save you? In my experience, it cuts my grocery bill by about 40% compared to just wandering into a grocery store and it takes between half an hour and an hour of effort, all told. In that situation, I just divide $12 by 0.4 and I see that if my normal grocery bill is more than $30, I’m going to save money by creating a meal plan and a grocery list than I’ll earn by working another hour.
On the other hand, many frugal tactics won’t save you enough money to really help. Washing baggies? If you’re spending enough time to actually get them clean, you’re not saving enough money to make a difference (use a reusable container that’s dishwasher safe instead). Making your own laundry soap? It’s a money saver, but probably isn’t worth it unless you’re already buying expensive laundry detergents. Clipping coupons? If you’re already using a smart grocery list, switching to a coupon strategy isn’t going to save you enough to make it worth the time to implement that strategy. These tactics help if you’re trying to get your head above water, but if you’re working toward financial independence, your effort is probably better spent improving your earnings.
This Is Too Much Number Crunching!
Many people see this type of comparison and immediately back away, thinking that it’s too much number crunching to bother with. Honestly, for most people, it is, so I suggest a more intuitive solution.
If it seems like the return on a frugal tactic is a big return, use it; otherwise, save it for when you’re really struggling.
Usually, a frugal tactic that has a very nice long-term return, like using a meal plan/grocery list system or installing LED light bulbs in your home, is pretty obvious up front. It really doesn’t take much proof to see how making a meal plan and then constructing a grocery list from that is going to massively trim your grocery store bill. You don’t need to be a rocket scientist to see how eliminating the purchase of 20 incandescent light bulbs and also trimming your energy use by 80% is almost a no-brainer, even with a much higher up-front cost.
Having at least a basic sense of what you actually earn really helps here, as well as an idea of what a frugal tactic will save you, but you don’t need to bother running the numbers for every little choice you make. If you spend much time thinking about it at all, your instincts will get quite good.
The Real Saver Is Behavior
The other kind of frugal tactic that’s always worth using is a behavior switch. By that, I mean swapping eating out for a meal at home or swapping a book purchased at the bookstore for a book from the library. You’re essentially making a direct substitution for a normal behavior instead of trying to incorporate something new into your life.
These are worth trying, even if they don’t save much. That’s because they have very little life impact. You’re not losing time by eating a meal at home or by “shopping” for books and movies at the library. You’re still getting a tasty meal. You’re still getting that book you want to read.
There are lots of substitutions like this – drinking coffee at work instead of at the coffee shop, watching over-the-air television and Netflix instead of cable, switching to a pay-as-you-go mobile plan instead of a contract. Those tend to be the easiest savings because they require virtually no extra time. They just cost less than your previous solution.
Time Is On Your Side
In the end, the frugal tactics to avoid are the ones that cause you to use a lot of time for a low financial reward, but that threshold of “low financial reward” is low for everyone. In my eyes, it’s worthwhile to spend a few moments assessing how much you really make at work and then using that as a rough benchmark for the other choices you make in life.
Spending less and earning more are complementary strategies. They both can play a valuable role in your life, but they prove themselves most useful at different times and in different ways.