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Creating Freedom Through Financial Independence


Earn More or Spend Less? Why Savings Rate is King

June 22, 2017

We’ve been talking about investing a lot lately.

Of course, investing is important.  But there are some other factors that have an undeniable link to your ability to escape the rat race.

Today, let’s talk about your income, and your spending.

There are two schools of thought out there.

One says you shouldn’t worry about saving, but instead, focus on earning more money to get ahead.  The other camp says you should focus on saving, and your income doesn’t matter too much.


Earn More?

The ‘Earn More’ idea says your time is much better spent earning, and saving money is for losers.  Just enjoy yourself and work your way up the wage ladder so you can earn more, then you can start thinking about saving.

The mindset being, there’ll be more money later anyway and you need a good life now!

You’ll be on the big bucks soon and then the saving can begin.  Enjoy it while you’re young.

This partly comes from a scarcity mindset, that there’s just not enough money to be able to save right now.

The problem is, the ‘saving’ part comes too late.  Here’s an all-too-common storyline…

Early-Mid twenties are spent maybe travelling, having fun with their income and just doing whatever they feel like! Late twenties are spent dating, meeting someone, settling down.

Thirties – buy your dream house, have kids.

Forties – pay for an up-sized house, pay kids education, spend on luxury cars, clothes and regular holidays. At this stage, it’s about enjoying the busy, successful career.

Fifties – think about retirement soon, start saving a bit, perhaps buy a cash hungry investment property or dabble in shares.

Sixties – pay off some debts.  Then, retire on the pension, super and whatever investments they’ve managed to build in these late stages.


Sound reasonable? Here’s the catch…

There is next to no flexibility built into that plan.  Work full-time to pay for an expensive lifestyle, or the party stops.

Don’t like your job?  Want to switch industries to something more enjoyable or meaningful, but for less pay?

Too bad, there’s bills to pay buddy.  Want 6 months off to spend time with a sick relative?

Not an option…. Want to be a stay-at-home parent to be with your kids more?

Sorry, outta luck.  Bills are waiting.  Car payments, mortgage, you name it!

My point is, we can pile on all the extras and luxuries we like, spend as much as we want having a great ‘lifestyle’, but there’s no freedom down that path!  It’s up to you.

Quite often the trade-off becomes, having a great ‘lifestyle’, but no life.

The work can never end and the pay never catches up to surpass the spending, making saving impossible. There’s always something new to spend our money on.

We really just need to find a good enough reason not to spend it.


Covering up the problem

‘Earn More’ theory says saving money is of limited value, since the there is a limit to the amount you can save.

This is true.  Earning money is effectively unlimited, since you can do more hours, get more qualifications, increasing your worth in the marketplace.   Also true.

The only issue with this is, you’re not solving the problem.   You can’t cure a spending problem with more money!

Earning more cash is mostly just masking the underlying truth, of being crap at managing money.

In the case of working more hours – you’re just trading more time for money, getting more and more time-poor.

The more time-poor we are, the more unhealthy we are and the more stressed we are too.  We’re more unsatisfied and spend more money as a result, on things we think will make us happier, save us time or bring us a little sugar hit of shopping joy, while we crank the work-spend treadmill into overdrive.

We should be trying to get our free time back, not give away more of it!


When earning more works

Earning more is fine, if you’ve got your spending under control and those extra earnings are going to translate into extra savings, bringing financial independence closer.

In most cases though, the problem is not about needing more money first.

Folks on lower wages of under 40k, could definitely make a point of trying to jump up the wage ladder if at all possible.  If not, they may just have to optimise a bit more than others, to be able to ratchet up their savings rate.  Renting out rooms in their house, or perhaps going car free etc.

A couple that’s earning 50k each, would both earn around 40k after tax, bringing their combined take-home pay to 80k.

With a few improvements to the typical household, they could easily live on 40k per year, allowing them to hit a savings rate of 50%.  Here’s what we spend in a year for example.

Many couples are on much, much more than this and save nothing!  It blows my mind where it must all disappear to!


Why your income is almost irrelevant

Let’s look at an example of the two different ends of the salary spectrum.  We will ignore tax for simplicity in this example.

Doctor – 500k income – saving 50k per year.

Factory Worker – 50k income – saving 5k per year.

Both have a savings rate of 10%, spending the other 90% of their wage.  Surprisingly, both will be able to retire at the same time despite the significant difference in their spending.

Wait, how is this possible?

Well, because our doctor friend spends 10 times as much, he needs 10 times as much in investments, to be able to retire.

Let’s say their investments will provide them around 5% per year in income.

With the doctor’s spending sitting at 450k, he will need a mountainous $9,000,000 to give his patients the flick!

If his investments are spitting out 5% income, $9,000,000 would provide him with the $450,000 he needs to live on.

Our factory worker will only need a much more manageable 900k, to secure his 45k income and clock out of that soul-sucking, smelly factory for the last time.*

Financial Independence is dictated more by your spending, than your income.  The goal is to maximise your savings rate, regardless of your income.

Sure, the doctor has the advantage, but he is pissing it away by his insane spending.

At least he’s way happier living it up though, right?

I doubt it.  Beyond the basic things we need like shelter, food, clothing, meaningful activities/hobbies, our happiness doesn’t actually improve that much, the more crap we buy, or the more lavish our lifestyle becomes.

In fact, I’ve found my happiness actually goes down when I feel like I’m being wasteful.  It just feels good to be in control and spend sensibly – almost like I’ve got my shit together!

It’s just being a dick to the planet by buying things we don’t need.

There’s a great old quote which says:  many people are buying things they don’t need, trying to impress people they don’t even like, with money they don’t have.

What they don’t realise is, they’re killing off their own future freedom.


Savings rate is king

So for me, I’m very much in the camp of focused saving, regardless of your income.

Of course high income earners have an advantage, but in Australia, even the lowest wages aren’t that low. Saving is really where the low hanging fruit is, just waiting to be picked.

I don’t believe in trying to earn more to compensate for a lack of discipline. In most cases, if people aren’t saving money on a lower wage then they won’t save on a higher wage either.

Having some self-control is a basic skill that most people fail to master.  This is a weakness that needs to be fixed, otherwise it never goes away.

As soon as there’s cash in the bank, apparently it needs a purpose.  That only purpose being “What can I spend this on?”

Why miss out? You only live once, right?

I couldn’t agree more.  You do only live once, as far as I know.  So, why the hell would you want to spend the majority of that one life at a job you don’t love?!**

Considering it only takes around 10 years to reach financial independence***, why not do that first?

10 years of working smart, for a lifetime of freedom!

After that, you can do whatever the hell you like.  You’ll end up making money later anyway, because you’ll want something productive and stimulating to do.  This is the cash that you can blow, if you still want to.

But the funny part is, once we started being frugal, living more simply and sensibly, we actually realised that we don’t need any of that other crap and our life is awesome the way it is!

So yes, your savings rate matters.  In baking your financial independence pie… it’s the key ingredient!


*I worked in factories during my 10 year working life, from age 18 to 28. I can confirm they are both soul-sucking and smelly 🙂

**If you wouldn’t do your current job for free, you don’t love it!

***I’m talking about real saving here (50%+ of take home pay) – not the piddly 10% the typical financial adviser suggests.  It can easily be less than 10 years, if you’re more efficient, have savings already, or more strategic with your living arrangements and bills.


2 Replies to “Earn More or Spend Less? Why Savings Rate is King”

  1. Good article, especially for people who need to hear that savings are super important and there’s not a lot of value in chasing higher and higher incomes to achieve a lifestyle of excess. Even a billionaire can become broke if they don’t ‘save’ money.

    We pushed our savings rate to the limit on a very small income coming in, it took a lot of dedication and there was no possible way to hit a 50% savings rate on less than 50k net in total. For us, having such a small income taught us the value of frugality and making our money work hard.. but what has really helped us get ahead and rocket our goals is having our income increase substantially since the middle/end of last year.
    Both the frugality and the earning more are equally as important in our situation and have become a powerful force together. I couldn’t pick which one is king – but I sure do feel such positive feelings whenever I think about our finances and how they’re going! No stress there.

    Mrs DDU

    1. Nice comment and great lesson. People confuse a high income with being rich. Income has nothing to do with how well off people really are!
      That’s great MRS DDU. I think your happy feelings come not from the income, but having a decent savings rate. High income high spenders are known to be stressed to the max!

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