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The Great Personal Finance Debate: Earning More vs. Saving More

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It’s one of the most spirited discussions in personal finance: should you be ‘earning more’ or ‘saving more’?

financial independence financial freedom

Each side in the fiscal standoff takes aim at the potential monetary upside of each approach to financial planning. The ‘earn more’ crowd points to a very cut-and-dry approach: making more money is the most efficient road to financial independence. The potential is limitless; there’s no ceiling on earning potential.

Team ‘save more’ argues that income and spending will naturally scale with one another. That means your spending will mirror your growing earning power, thereby making any extra income unnoticeable. In turn, a focus on frugality is the best mindset for establishing financial freedom.

Which fiscal approach is the better way to fiscal independence? Is one superior to the other?

What Neither Side Will Admit

The reason the ‘earn more’ enthusiasts will never see eye-to-eye with the ‘save more’ believers is both sides carry unstated assumptions. Those in favour of bettering earning potential believe they’ll continue to spend a fixed amount, regardless of fluctuating income. Those that feel saving is the way to go are under the impression that income spent is locked to a spending percentage.

In other words, it’s a simple difference in perspective.

The cliché ‘if you earn more, you’ll spend more’ boils down to behaviour and mindset. Its argument is that earners will spend a set portion of their income – whether that’s 10%, or 90% – regardless of what they’re earning.

‘The more you earn, the more you save’ is the mathematical and logical viewpoint. The reasoning here revolves around a baseline foundation that covers your cost-of-living + any comfort items, within reason. Any extra surplus income is siphoned directly to savings, equating to higher surpluses=more savings.

Interestingly, while the perspectives of the ‘earn more’ vs. ‘save more’ groups are polar opposites, both financial planning strategies focus on one essential objective: growing the gap between income and spending.

The Real Question You Should be Asking is…

This is where the earn mores and the save mores can reconcile, as the debate shouldn’t be ‘should I be earning more, or saving more?’, but rather: ‘how can I grow the income-spending gap?’

This gap should be your only focus when working towards financial stability. The equation can be simply defined as:

$X – $Y. Yup, that’s it.

X represents your earnings, while Y denotes (can you guess?) what you spend. There are no other contingencies you need to concern yourself with – this is the basis of your fiscal objective.

And that simplifies your job: making this gap as large as possible.

It doesn’t matter how you go about it. You can lift X higher. You can drive Y lower. You can push up and down simultaneously. When it comes down to it, it’s all about how large that chasm is, not how it was created (just don’t do anything illegal).

From there, that gap money can be invested in anything that creates cash flow. ‘Cash flow’ is the vital term here; purchases like your home is not a cash-flow investment. Rental properties, index funds, or owning your business are excellent examples of ways to build account balances.

The Power of the Gap and Financial Freedom

How can you use the knowledge of this fiscal gap to your advantage? Let’s use retirement as an example, since that’s what you’re really working towards when you enter the work force.

Say you’re earning a cool $100,000 annually, post-taxes. If you spend $60,000 in living expenses, that’s a $40,000 gap that can be put towards cash-flow investments such as index funds.

To expand on this scribble-on-a-napkin calculation, let’s go a step further and say the index funds you’ve invested in are doing well, growing at 7% compounding annually. At that salary and investment growth, that swells to $1.5 million after just 19 years.

If you were to stop working, and steadily withdraw 4% of it (we’ll fall in line with the widely-accepted ‘4 percent rule‘ here), you’ll enjoy $60,000 a year (pre-tax) for the rest of your life. For those keeping score at home, that’s financial independence in under two decades (albeit at an exceptional salary).

Did you notice anything missing from that equation that took us from $0 to retirement in 19 years, securing financial independence? Earning more, or saving more, isn’t a factor. It’s what you do with extra income, namely putting it towards cash flow to grow the gap, that matters in the endgame.

So for you ‘earn more’ and ‘save more’ supporters – it’s time to unite. Financial independence narrows down to one singular ambition: making the gap larger (think David Letterman or Mike Tyson for a convenient reference point).

Grow it, invest it, repeat. That’s what it all comes down to; focus on this, and everything will fall into place.

Are you ready to start investing in cash-flow positive ventures to start building that gap? Magical Credit can help facilitate your retirement with small, short-term loans for anyone with a steady source of income. We provide loans between $2,000-$10,000 for consumers, perfect for a small investment or otherwise.

Take the first step towards financial independence by calling us today at 1-877-213-2088.