Over the weekend, I had a short chat with a good friend from college over the age-old question of bettering one’s personal finances either through more income or less expenses. I remember naively trying to estimate how much it’d cost to live comfortably back as a student getting my first full-time job, and our conversation highlighted how far removed real-world finances were from my imagination.
But back on the idea of income vs. expenses, the gist is that to improve your finances, you can either:
- Earn more dollars, or
- Further stretch the dollars you are earning.
The former is accomplished through working more hours, upgrading your skills to command a higher salary, or generating passive income. The latter is looking for cheaper alternatives, waiting for sales or coupons or special offers before buying, and – though a bit of a stretch in terms of “expenses” – modifying your lifestyle and expectations for cheaper living overall. Common wisdom is that reducing expenses is preferred over making additional income, as income will be taxed.
My argument was that to min-max personal finances, start by cutting easiest expenses, but only up to the point where the opportunity cost for income outweighs the savings or creates an unpleasant tradeoff in wants. I categorize all these strategies as requiring some amount of work, but I personally do not enjoy clipping coupons or rotating credit card usage. The biggest advantage this work around expenses is that they’re universally applicable, and everybody can participate in cheapening their spending.
On the flip side, finding ways to boost income works – as long as there is more income to be earned. For some folks, this takes the form of overtime; for others, it’s earning additional credentials to qualify for higher-paying jobs. We software developers love income-generating side projects, while those with more capital invest it in real estate and more exotic asset classes.
For most people, there is a balance to strike on both sides, but our system of capitalism rewards income-generation beyond a certain threshold. That is, while there is a definite floor on how much you can cut costs, creating more income is essentially unbounded, and grows from linear (e.g., works more hours) to exponential (e.g., compound returns on investments). Even with taxes, there is no real ceiling on earnings potential.
But that optimism has to be squared with the reality of unequal access. In addition to valuing the stability of regular salary, many of those avenues of making money are locked behind social, capital and political gates. That possibility just adds another variable to the decision.