Last updated in September 2020
Whether you increase your income or cut your expenses can have a dramatic impact on your finances and your life. There are mixed arguments out there, for some making money is the key. For others, it is living frugally and spending less.
This article solves the ongoing debate and sheds light on the issue. Which is the most effective strategy for effective money management, and ultimately to retire early?
Table of Contents
Should you increase your income or cut your expenses
Increasing your income
Compared to cutting your expenses, increasing your income has a number of benefits. Firstly, there is no limit to how much you can earn (in theory at least). You can stack income streams until you hit six figures or more.
Additionally, you will also be able to enjoy a more comfortable lifestyle. There will not be any penny-pinching and if you fancy making a purchase, nothing is stopping you. Furthermore, you can be generous with your money and donate or buy presents for your loved ones.
Equally, you can also feel more secure if you are earning a high income. If you are hit with an unexpected bill, you can easily pay for it. And let us not forget about your pension contribution. If your income comes from employed work, your pension contribution will be higher if you are earning a lot. Plus, your employer may even match your contribution.
Approaches to increasing your income
There are multiple ways to increase your income. You can search for a better-paid job or develop your career, start a side hustle, or make money through other activities such as online surveys.
Doing online surveys or other online activities is something you can start today (short term). Setting up a side hustle takes slightly longer but you will also be able to earn more. Lastly, finding a better-paid job or developing your career is more of a long-term approach for most of us.
Filling in surveys takes little effort but you will likely not make enough for it to have a significant impact. Setting up a side hustle often comes with a substantial upfront effort. Subsequently, you will also have to put in the effort to keep your side business running.
Finally, advancing your career or even switching jobs can be high or low effort, depending on your current position. Some may have to completely retrain or go back to university, whereas others can simply ask for a promotion.
Cutting your expenses
Compared to improving your income, the main benefit of cutting your expenses is of mental nature. You can free yourself of clutter and only buy what you need. A frugal lifestyle leads to a happy and mindful life.
Moreover, there is also a financial benefit. If you need less money to live, your financial independence, retire early (FIRE) number is also more easily achievable. The amount of money you need to live per year is the basis of this number. With lower expenses, it will also be lower.
Another point to take into consideration is security. Different to increasing your income, you may not be prepared for unexpected large bills. However, as you need less money to survive, you can more easily adapt to change.
Cutting your expenses is easy and you can even start right now. Cancelling your unused subscriptions and making a budget are things that can be done overnight. Choosing a cheaper supermarket and learn how to cook meals yourself can be done in a week.
However, if you are already living cheaply, reducing your expenses further gets very hard and may not be realistic. You can move to a cheaper area perhaps, but there will still be a cost associated with living.
Which one is better?
Assuming you want to save £1,000, you either have to reduce your expenses by £1,000 or increase your income by ~£1,200 (as a basic-rate taxpayer). On the first glance, it may be easier to cut your expenses but there is a limit to how much you can cut.
Over the long-term, increasing your income may seem to have the advantage as there is no limit as to how much you can earn. However, this is countered by the fact that cutting your expenses means you will need less money to retire early.
Generally, the easiest way may be the middle path of cutting your expenses by £500 and increasing your income by ~£600. This way, you would divide your efforts equally, and would not have to choose between increasing your income or cutting your expenses.
Find out what is right for you
Choosing the middle path of increasing your income and cutting your expenses may work for many people, but not for everyone. The optimal choice depends on your circumstances.
The most effective approach is doing what is easiest to achieve. If you know you are spending more than you should, cutting your expenses will have a bigger impact. If you have the potential to dramatically increase your income, then that should be your focus.
Equally, some people already live frugally and others have already maxed out their earning potential. For these people, the obvious choice is to work on the respective other factor.
In an ideal world, you will end up with a high income and low expenses. This would allow you to save more than half of your income and become financially independent in a short amount of time. However, life is not that easy and there are many other factors to take into account.
Should you increase your income or cut your expenses summary
Both increasing your income and cutting your expenses is a valid way to save money. There is no right choice that suits everyone. Instead, whether you should focus on increasing your income or cutting your expenses depends on your personal circumstances.
When you are deciding whether you should increase your income or cut your expenses, there are many factors to take into account. However, what is certain is that the most effective way is to work on both, starting with whatever is easier for you.
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