The most common narrative given in personal finance circles is that you should always live within your means. This is a solid piece of advice but what really is your means?
Most people have never taken the time to explore their financial potential. Your idea of what your means is is probably limited to what you are earning right now. The truth is, if you cared to and actually put in some effort, you can earn a lot more money than you are currently earning.
When people live within their means, one of the objectives they are aiming to achieve is to have some money left over every month. The natural thing to do in this situation is to cut down on spending so that there is a surplus.
Cutting down on spending is not the only way to end up with a surplus, though. It is the easy way but not the most productive way. The most productive path is to earn more money.
Why is earning more money the most productive path to take if you want to always have a surplus every month? Below are five reasons why:
1. There Is No Limit to How Much Money You Can Earn
There really is no limit to how much money you can earn. This might sound strange to you if you are struggling financially but it is the truth.
Money is a medium of exchange. When you deliver a good or service, people pay you money ‘equivalent’ to the value of the good or service. There are billions of people roaming the planet. Finding a way to serve some of them to make tons of money is not that hard.
While there is no limit to how much money you can earn, there is a limit to how much spending cuts you can make. You need certain basic goods and services to live a healthy and happy life. Beyond a certain point, any cutback will affect your quality of life badly.
If your goal is to have a huge surplus, you should, therefore, focus on increasing your income. Your surplus will get bigger and bigger as income increases if you also avoid lifestyle inflation.
2. You Will Develop Wealth Habits
Most of what it takes to build an amazing wealthy life is habits and mindset shifts. There are habits that encourage wealth building and habits that ensure an individual remains poor for the rest of their life.
One of the mindset shits you will develop as you start to build wealth is that you need to constantly seek expansion. When you are constantly cutting back on your expenses, your focus is contraction and not expansion. Such a mindset cannot support rapid financial growth.
3. Compound Interest Works Best with Large Numbers
Most people save so that they can direct their savings to investments such as index funds. They are hoping that they will earn enough from capital appreciation or compound interest to make them rich.
Investing in these schemes is actually a good idea but it works best if you have a large principal. Instead of cutting back to save $10,000, you will be better of focusing your energies on earning an extra $100,000 to serve as your principal.
The 20-year average investment rate of return for S&P 500 is 7.61%. If you invest $10,000 today, it will be worth $43,356 in 20 years. If you invest $100,000 instead, it will be worth $433,563 in 20 years.
The bigger the amount you invest today, the more your final figure becomes disproportionately bigger. Your best bet to getting the money you need to start off with large numbers is to earn more money.
4. You Avoid the Folly of Postponing the Good Life
The argument that you should save, save, and save some more so that you can magically retire rich at 60 is an uninspiring one. Even if you do end up rich at 60, will the sacrifice be worth it?
It is far much better to live a fulfilling life not restricted by money when you are young and energetic enough to enjoy the good life. Postponing the good life is never a good idea. You can have it now.
5. You Can Help the People and Causes You Care About
When you are still trying to save as much money as you can so that you can have a surplus at the end of the month, it is very unlikely that you will spare enough money to help the people or causes you care about.
Shifting your focus to earning more money will give you a chance to help more people. When your family members encounter an unexpected financial hurdle, they won’t have to turn to banks to take an emergency loan. You will be in a great position to help them jump over the hurdle without having to make painful sacrifices yourself.
The arguments for earning more money do not take away from the importance of having a sound savings plan. You should still save money. It is easier, though, to save money if you are constantly increasing your income while avoiding lifestyle inflation.