Is it Better To Be Frugal or Earn More?
| March 15, 2012 | Posted by Roshawn Watson under Uncategorized |
By: Roshawn Watson
I’d like to live as a poor man with lots of money. – Pablo Picasso
There are plenty of millionaires who attribute much of their wealth to frugality, but the fact remains the average income of millionaire households is approximately $350,000 (~5x the national average), so it is certainly not frugality alone that accounts for building wealth.Today, we explore the loaded question: is it better to be frugal or to be a high earner?
What’s Your Potential?
What would you attempt to do if you knew that you could not fail? In so many cases, your answer will account for a mere fraction of your potential. Ultimate Guide to Becoming a Doer
We all have different earning potentials. General income trends are just guidances that fail to account for the unique ways you may leverage your skills, abilities, and passions that go beyond your education, profession, gender, race, and socioeconomic status. If your potential could be fully-characterized by a mere formula, believe me, it would already be marketed and packaged for you to buy for $5.99. We know that’s not the case. For example, an ex-convict who has much trouble speaking (3rd grade education) decided he didn’t like his odds finding solid traditional employment, so he embarked on several entrepreneurial endeavors and earns in excess of $30,000 per month. I’m sure plenty of people wrote him off, but that didn’t stop him from finding his niche.
It is unfortunate when people retreat to cutting lifestyle as their only way to build wealth because they have all but written off increasing their earning potential. Considering that most people don’t meaningfully increase their income by chance, if you aren’t deliberate about increasing your earning power, it may be difficult and lengthy to manifest.
Are You Really Frugal?
The best offense is a good defense.
Frugality deals with obtaining value from your resources (such as money). Perhaps the most derisive aspect of frugality is that value is subjective. What’s frugal to you may be wasteful to me and vice versa. It is somewhat ridiculous for the “frugality police” to get on their soapboxes deriding anyone who spends his or her money differently. Having different values doesn’t mean that someone is wasteful per se. The issue is more complex. For example, changing your own oil can be frugal. However, if one’s argument against doing so is “my time is worth more than the cost to have someone else change it for me, so I would rather spend my time in my areas of core competency,” then how is that not frugal? After all, he is obtaining maximum value from his resources.
Interestingly, most millionaires are frugal but are not necessarily “first-cost” sensitive. Instead, millionaires are “life-cycle-cost sensitive,” so the total costs rather than upfront costs are most important. The initial sticker shock of paying someone to do tasks you could do for yourself or paying extra for higher quality products or services is often deceptive, as the total costs of going the “expensive” route may indeed be less. Additionally, imagine the profound life-cycle benefit of continually investing time in improving your professional credentials, personal brand, knowledge-base, and network instead of spending your time doing all repairs and maintenance work yourself. Simply put, just because you can doesn’t mean that you should. This is why the large majority of millionaires are not do-it-yourselfers! (For more characteristics of the wealthy, please check out millionaire facts)
True frugality is not about being penny wise but pound foolish.
The Power of Earning More
Of course, earning more also gives you many options. First and foremost, it is mathematically easier to hit certain financial goals when you earn more (all other things being equal). Second, earning more may yield more flexibility with your time. For example, rather than increasing your personal production through sleep deprivation, neglected relationships, and other sacrifices, you can improve your production capacity. This may mean bringing someone else on your team to carry some of the burdens or using technology that enables you to do more with less. While this may involve added costs, you can still come out ahead financially provided that gains from the increased production capacity exceeds the added costs of hiring help or paying for technological advances. Don’t spend so much time trying to be productive that their is nothing left to give, which is why Stephen Covey noted that highly effective people are mindful of their production versus production capacity balance.
With our technology, with objects, literally three people in a garage can blow away what 200 people at Microsoft can do… Corporate America has a need that is so huge and can save them so much money, or make them so much money, or cost them so much money if they miss it… Steve Jobs
Concluding Remarks
In the end, the debate over frugality versus increasing income will continue, probably unnecessarily so because earning more and being frugal are not mutually exclusive. Most millionaire households obtain their financial footing through embracing both frugality and earning more. For example, just as affluent households are more likely to use coupons (frugal activity) compared with less affluent households, millionaire households have average annual incomes that place them in or near the top 1% of earners (~5x the average American household). The distinction of whether frugality or earning power contributes more to overall economic success ultimately depends on the economic productivity of the household, which varies. Recall, “Toyota Millionaires” differ from “Mercedes Millionaires” both in terms of their degrees of frugality and economic productivity, yet both are considerably more frugal and economically productive than the general population. Perhaps rather than determining which is better, the real question is whether your household financial practices will help you reach your financial goals.
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We're trying to earn more. We've cut back a lot, and now the main thing we nee to do is increase income.
Amen to that. After you have cut back, sometimes increasing income seems like the only reasonable option.
As you rightly point out, being frugal and increasing your earnings are not mutually exclusive. I think of it as two sides of the same coin.
I wish we thought about it from that perspective more often.
You can only cut your expenses so much. Earning more is more important in the long run. After that you should be value conscious and stretch your money.
There are DEFINITELY limits to which one can cut back. Too often people take cutting back to an extreme OVER trying a hybrid (frugality + increased income) strategy.
I believe that it is harder to be frugal the greater your income. I see this first hand when I see wealthy people paying outrageous amounts for money management. They have no idea how much they are paying and really don't care. When I was earning way beyond what I thought possible it was nothing for me to go into Borders and buy $300 worth of books without bothering to look at the prices. Not today. I tend to check out books from the library and then buy them only if I like them and send the balance to Children's Hospital or contribute to the local fire department.
Kudos to you for your charitable giving! Spending pressure definitely grows with income. I've been there too (wasn't bad, but it was definitely a power that I wrestled against). It is amazing how you can combat a sense of entitlement or "doctitis" after you have finally obtain some of the fruits of your labor. I think overall age may also play a role too: if everyone in your peer group is significantly past you in terms of lifestyle, then you may feel somewhat offtrack for not spending more.
Both, though having a higher income does open more doors. 🙂
Hey you cheated 🙂 I definitely know hat you mean. I am very glad that they are not mutually exclusive.
If I had to choose- I'd want to earn more. But luckily, I don't have to choose. I can do both & leave the debate of which one is "better" to others.
I'm so sorry I'm late replying. I thought I had replied earlier. I definitely agree that we don't have to choose one or the other. I only framed it that way so that we could explore the topic deeper. Choose both!!!
Great observations. Either way (frugality or earning more) will get you ahead financially, but it does matter where you are financially as to which to do.
Yeah, this is definitely not an either or type situation. I guess posing the question this way is somewhat (almost entirely) academic for most people.
I don't believe increased earnings and frugality are mutually exclusive either. The differentiator may be whether one sees value in each of these. With regard to earning more, the ultimate decision maker is still you — if your company won't pay you more, find another job. With regard to frugality, that too is behavior that can be changed.
The start for both, however, may be assessing one's current situation ruthlessly. Being honest about income, expenses and/or debt, is the place to start, IMHO.
I definitely like how your answer indicates an external locus of control. You are right: we are the deciding factors. Too often we don't act like. We relinquish control to the economy or our jobs and deny ourselves the influence that we rightly have. Also, honesty is always a refreshing and great place to start.
The trap of earning more is that you upgrade your lifestyle and build an addiction and no wealth. Once your earnings drop for one reason or another, you have to kick your life style and that is hard. Especially when you have not build any wealth. I'd say: start frugal, spend less than you earn and always increase your spending with less than half the increase of your earnings. With that in mind, you have a good basis to start working on boosting your earnings and wealth.
I agree. Once lifestyle inflation starts, it can be very difficult to halt. It creeps in, and you don't even realize it. Soon it seems seemingly impossible to shake the grips of stuff. However, if you start frugal and continue to be frugal while continue to increase your income, you can have a more gradual increase in lifestyle, yet build wealth over time.
I think what is often lost in the debate is that frugality can be an end in itself, not just a means to an end. The which is "better" debate focuses on how useful earning more or being frugal is to one's life. There is an intrinsic value in being frugal. Appreciating this value causes one to embrace frugality as a lifestyle, not just something that is to be endured. Being frugal in the face of an abundance of income is the true objective.
Thanks for elevating the discussion. I'm so with you. Frugality is a means to an end at times. Looking at frugality more long-term, it is also a paradigm by which we evaluate potential purchases. You're completely right: the better phrasing was really just a means to explore some of the underlying complexities of these 2 positions. I do think that frugality has SO much intrinsic value, but I guess so does the ability to dramatically increase one's income. I do hope frugality is very much a part of everyone's lifestyle, especially high-achievers; otherwise, their spendthrift ways will continually dismantle all of their hard work. Unfortunately, this is the reality of many professionals that I know.
This is an interesting dichotomy. There's no point earning more if you're not going to be frugal with the new amount of income! Earning more is great but I agree perhaps the key here is to be frugal regardless of income. Frugal trumps income?
Hi Drew, it sounds like you are very sold on frugality. I think the counter-position is simple: I want to earn more so that I can enjoy my toys. While I agree with you pleasure that you derive from such purchases would be fleeting, for some people (too many), that appears to be enough, no?
Anyway, I'm with you: be frugal regardless of income. That's something that anyone could embrace! Right on!
The key is to keep increasing earnings, while living way below your means. One should always think about increasing his or her revenue, but should keep expenses in check at the same time to have money to take bigger risks. Remember, it always takes some form of risk to increase earnings.
Agreed. That's what it boils down to from a purely PF standpoint: keeping increased earnings. Also, too often we don't think about increasing our income in meaningful ways. That's also part of the challenge. You bring up a VERY interesting point about the risks associated with INCREASED earnings. I guess if someone is increasing passive or portfolio income, I can see the risk easily. It appears a little more fuzzy if someone is targeting increased earnings via their primary job (rather than via a inter-company move). I'm not saying ANY job is save; I guess I don't see the extra risk in pursuing a higher salary within your position. Otherwise though, I'm completely with you!
I’d like to live as a poor man with lots of money. – Pablo Picasso – I love this quote! I love the flexibility of having the funds to meet your needs, and living well below your means. There are not many better feelings than knowing you can make ends meet every month and having plenty of funds in the bank to weather any financial storm.
When I saw that quote, I loved it too.
I agree, the flexibility definitely is freedom, which is so important for financial peace. I'm REALLY with you. I stress that repeatedly because it has revolutionized my life too. It is just so unfortunate that most people don't have such peace though.
My feeling is that both need to be taken into account. Ultimately, what has the most value is freedom. It's hard to enjoy life with no money, but working too hard to support an expensive lifestyle is just as hard to enjoy. A frugal but comfortable life is the least stressful.
I'm with you. They're definitely not mutually exclusive, and having both is indeed the best of both worlds.
Learning to increase your earning power is a skill that cannot be taken from you even if you run into hard times. Frugality only goes so far and if your income is low to start with, can't do much for you.
Great point! This is definitely an important skill. It's one that not everyone learns. It's not directly taught in school either. I'm with you. I also recognize that there are limits to both. For example, some people try to earn their way out of bad decisions. At the end of the day, but are valuable.
I’m definitely in the camp of “earning more” than just spending less. Your income is one of the biggest wealth building tools you can have. In my opinion, my earning potential is only hindered by my lack of discipline and drive. Otherwise the sky is the limit!
That's a great point. I definitely think that your income is your most powerful wealth building tools. I guess the problem that I have with being too income-centric with wealth building is that without budgeting and frugality, high income earners are still broke. There are many professionals who have expenses that greatly reduce their wealth.
My husband and I have never considered ourselves to be in the "earning more" category, but a new job offer I received recently will change that. Will we maintain our frugal ways? To some extent, although we'll loosen the purse strings a little to have fun as well. Your article totally made me think of Warren Buffet, and the fact that he still lives in his original house!
Congrats on the new job Elizabeth. Yeah, the legendary Warren Buffet and Sam Walton are 2 prime examples of people who billionaires who are/were frugal. I don't think they enjoy/enjoyed their lives any less than their spendthrift counterparts. That's food for thought.
Need to catch up on your Toyota vs Mercedes millionaires. Great post as usual. Love the point about being BOTH, frugal and earning more!
Thanks Buck. It is really not either or, so yes you can enjoy BOTH.
Thanks for sharing Roshawn,
I think best way would be to try to earn more, invest more and live frugal life
You are welcome Karunesh. Thank you for commenting!
I agree with you that it is BEST to have both. That way you are not limited.
Have I mentioned that I like dialectics? I will use this here and say that I believe neither is better but both earning more and being careful are important. Given that frugality is seen as the art-form of minimising spending without compromising quality. So, I agree with you on this one!
I have always been 'extend your clothe' kind of persona – in everything I do. So for me, earning more has always been primary to frugality.
Maria, every now and then, I have to put on my teacher cap. I agree with you wholeheartedly: both are important to wealth building. Many professionals are focused on earning more. To be honest, cannot say that we're any different. However, I definitely like the fact that we are frugal too, perhaps not the same definition of frugal that is popularized though.
Agree; it is always a balance – if one doesn't know how much they spend it doesn't matter how much they earn. Good work!
Earn, earn earn! No limit for earning as the saving has.
SB, I agree that there is no limit to earning more, but that still doesn't mean that there are not plenty of high income professionals that are completely broke, no? I know several unfortunately.
Earn more and keep same lifestyle. Invest more in income producing investments so that you can retire early. Check my latest post. 🙂
http://www.streetsmartfinance.org/2012/03/24/a-su…
Done. Thanks for your comment!
I find that having a frugal mindset has been inexorably tied to my path to wealth. Without taking the time to consciously evaluate my purchase decisions, I know that my savings path would be that much harder.
I can totally agree with this statement. Most millionaires are frugal, contrary to how millionaires are displayed on television, so I think we would find frugality and wealth to be correlative.
Great thoughts roshawn – I think that you need both, but to start off with frugality is more important – it's immediate (most of the time) and it will take longer to increase your income through a side business or otherwize
Thanks Jeff!
That's very true. You do get an instance financial benefit from being frugal, and that can enhance your ability to fund an entrepreneurial effort.
My thinking is that you won't get rich by being frugal but you could by earning more.
I thin I know where you are coming from, but since frugality and wealth buildng frequently go hand and hand, I'm not sure it is a zero sums game at all.
Being frugal has different levels. To live a frugal life is good as long as you don't deprive yourself of quality and joyful life.
But to attain financial freedom, earning more should be part of the process. It won't happen in one night. But diligence and working on possible passive sources of income will bring you there.
Yes, I agree that both are important. Focusing solely on "one or the other" is a little short-sighted and certainly suboptimal.
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