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Which do you think is better worth your time: spending less or earning more?

It’s actually a harder question than I initially thought. There are some important pros and cons to both, and they’re not immediately obvious.

A pound saved is worth more than a pound earned

“I don’t mind spending £30 on a cleaner, I’ll just earn an extra £30”

Noooooo. Stop right now and let’s address this massive misconception. A pound earned is not the at all the same as a pound saved.

Remember pesky tax. Your headline salary is not the same as your take home earnings.

Let’s say you get some freelancing work on the side and manage to earn an extra £10,000 on top of your standard £25,000 salary. How much of that extra £10,000 would you actually keep? About £7,000.

Let’s say the you instead spent the time you would have spent freelancing on cutting your costs. You cooked all your own meals, cycled instead of drove a car and learnt how to do DIY. After all that you have managed to cut your expenses by £10,000. How much of it do you get to keep? All of it!

The value of a pound is relative to how many pounds you have.

This is a hard one to get your head around. Basically how much money is worth to you changes depending on how much of it you have.

Let’s so you have nothing, £0 in the bank. Your little girl is going hungry, you’re going to miss your rent, you can’t afford to put the heating on – how much would £1,000 dropped into your bank account be worth to you? What would you be willing to do for it? Almost anything.

Let’s say you having £10,000,000 in the bank account. How much now would an extra £1,000 be worth to you? I doubt you’d even bother to get off the sofa for it.

Let’s consider two people. One person has a take home income of £25,000 and spends £15,000. The other has a take home income of £35,000 and spends £25,000. They are both saving exactly the same amount each year, £10,000.

Let us also say that they’re saving for a purpose, and that purpose is financial independence and early retirement. They need to save and invest enough money so that the profit they earn from the savings eclipses the amount they spend.

How long would it take each of them to reach early retirement?

Spending £15,000 a year. 21.6 years.
Spending £25,000 a year. 29.5 years.
(that’s on a 5% annual return and a withdrawal rate of 4%)

That’s almost 8 years different!

They are both saving the exact same amount a year, but one of them is going to working for years longer than the other.

There is a cap on how much you can save

Great – so far we are really loving the frugal, money saving options. Each pound is worth more both absolutely and relatively. But the competition isn’t over yet, and earning still has one massive advantage. There is no cap to how much you can earn.

Or to put it another way there is a limit to how much you can save. Let’s look at our theoretical friend earning £25,000 a year. If he is superhumanly efficient and frugal he might be able to live on £12,000 a year. If he is able to move moves countries, earn remotely and settles in Chiang Mai or Dhaka he could probably get that down to £7,000 a year.

But even after all of that you’re only managing to save £18,000 a year. That’s a lot of money (retirement in 8.1 years!), but that’s the limit.

On the other hand there is no theoretical limit on how much you can earn. When you’re scraping the barrel, unscrewing the light bulbs to save a few pence a day, it will be much easier to earn an extra £10 that to save an extra £1.

So what should you do? Spend less or earn more?

Easy. Do both.

But what should you do right now? Here’s what I do:

If it is harder to save £1 than earn £2 – earn, otherwise save.