If you’ve ever read five words about personal finance, they were probably “Spend less than you earn.” It’s popular because it’s simple. In fact, it’s too simple. It’s the smallest piece of a big puzzle with lots of complicated parts. It’s time we taught those instead.
What’s Wrong With “Spend Less Than You Earn”?
Before I talk about the problems with this advice, I want to point out that I don’t think this advice is wrong. You make X amount of dollars per month and you spend Y amount. If Y is greater than X, you won’t be able to pay your bills, save for the future, or fix your car when it breaks. I think we can all agree that that’s a bad way to live.
The problem with this advice isn’t that it’s bad, it’s that most people already instinctively understand it. That’s not to say everyone is good at following it, but instinctively we get it. Why wouldn’t we? We’ve had it beat into our heads since we were in Kindergarten. “If Billy has 10 apples, and he gives away 12, how many of Billy’s kneecaps will the loan shark break?”
Life, on the other hand, is less intuitive than simple subtraction. Between social pressures and the inevitable catch-22s of improving your career, it’s easy to slip into a hole without knowing it. Sometimes being irresponsible gets you there, but many more times life gets in the way. An unexpected car bill ruins your savings plan for six months. You lose your job right when you need your medical insurance. Not to mention, the “spend less than you earn” advice rarely accounts for opportunity cost. While you’re staying at home with Netflix, your coworkers may be out at the bar networking, making the connections that will land them better jobs.
If you have $10k in credit card debt that you spent on gadgets and toys, yes. You need this advice. On the other hand, if you’re buried under a mountain of student loan debt or your credit cards have spiraled out of control because your car sucks, “spend less than you earn” is glib, snarky, and useless. Sometimes choices are complicated and this advice often ignores that.
Sometimes Spending Is Necessary to Earn More
Part of the problem with “spend less than you earn” is that so much other advice directly contradicts it. When I graduated high school, for example, I got one piece of advice that I took to heart: Every man should own a suit. This advice is well-intentioned. No one wants to be unprepared for fancy events, and looking good can make a difference during a job interview. There was just one problem: I didn’t have money for a suit. My first job, like so many millions of Americans, was at Walmart. Getting a suit would’ve been a week’s worth of work even on the low end. And sure, while owning a suit would’ve helped me impress potential employers and fit in at networking events, I couldn’t justify the expense.
Whether we’re aware of it or not, life is full of these little choices. Competing in the job market, keeping up with your social circle, and pursuing relationships or a family all incur massive costs in small increments over time. While hardcore frugalites will tell you that you don’t have to buy everything that your peers do (and they’re right), those sacrifices often come with social costs. I mentioned in a previous article how I bought a smartphone on credit when I was broke, which is a terrible decision. On the other hand, without it I wouldn’t have been able to start writing about Android, which is what kickstarted my career. Whether we like to admit it or not, having more stuff can give you more opportunity. In my case, buying the phone was better than buying the suit because it helped kickstart my career. For someone else, the suit might be a better choice. However, in virtually all situations, there are cases where buying something can give you a leg up.
These might seem frivolous, but they add up over time. Your wardrobe, your gear, and your opportunities can all cost money. Rather than spending less as an absolute rule, you need to learn how to invest in yourself. Investing, as a principle, is about spending money now to enrich yourself in the future. When your budget is limited, try to view your expenditures as investments and gauge how well they’ll pay off over time. Will emptying your wallet on Steam sales pay off? Will buying a suit? Or a smartphone? Sometimes the answer genuinely is yes, but it helps to have a plan for how those investments will make you better off in the future. However, shaming any purchase just because spending is bad isn’t helpful.
Spending Less Isn’t Helping if You’re Already Broke
It’s generally assumed that, as long as you have a home to live in, non-Ramen food, and any entertainment activities, you have some kind of expenses you can cut. This assumption is pretty crass and assumes that people with less money don’t deserve to decide how well they live, eat, or are entertained, but we’ll set that aside for the moment. The bigger problem is that, many times, money problems occur because spending less isn’t an option at all. There are numerous scenarios that could lead to someone being unable to balance their budget through spending cuts alone:
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Unbearable housing costs: As news site Vox recently found, a person making minimum wage cannot afford a 1-bedroom apartment anywhere in the United States, without the cost exceeding more than 30% of their income. As the U.S. Bureau of Labor Statistics found in 2013, 4.3% of hourly workers made at or less than the minimum wage. Of course, this doesn’t take into account those who make only slightly more than the minimum, have multiple jobs, or live with roommates. However, it’s easy to see how housing costs can eat up even a hard worker’s budget.
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High student loan debt: Student loan debt is an increasing problem, not just because it strains a person’s finances, but because it’s usually necessary for improving your career. The average student loan debt approached $30,000 in 2013. On a ten-year term, the monthly payments toward student loan can range from $200-500 per month. Of course, that assumes that you take ten years to pay them off, which will cost even more in the long run. If you want to save money on interest, you run the risk of your student loan payment approaching the cost of your rent in many areas.
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Unexpected medical expenses: You can keep your rent costs below 30% of your income, only eat out twice a week, and skip every Steam sale you see, but an unexpected medical expense can still destroy your finances. As CNBC reported in 2013, medical expenses were the #1 cause of bankruptcies in the United States that year, affecting nearly 2 million people.
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Snowballing municipal violations: For many people, getting a ticket for something minor like lapsed car registration can kickstart a cycle that costs a crippling amount of money. If you’re not making a comfortable salary, a traffic ticket that costs a couple hundred dollars can spiral upwards with late fees, higher insurance costs, or lost work hours. John Oliver has a masterful explainer on how minor municipal violations can cause devastating damage to someone’s finances.
Individually, any one of these scenarios can cause huge headaches for someone’s finances. If you’re below middle class, even one of these can leave you unable to save effectively at all for potentially years. That’s not to say that reducing your spending is pointless. If your rent costs are 40-50% of your take home pay, then every dollar you don’t spend at the movies is a dollar you can spend on better food. However, you’re not clawing your way to financial independence by clipping coupons alone. It can’t hurt, but it’s not enough.
Saving Is Important, but It Isn’t Enough
More often than not, when someone says “spend less than you earn” (outside of any other context), what they really mean is just “spend less.” However, spending is just one of the two numbers that you use to determine your financial “gap”. You can only reduce your spending so far. Increasing your income, on the other hand has virtually no limit. Making more money is a lot harder, of course, especially if you’re already in a financially crippling situation. It’s also quite often the only solution that works long-term. If you’re making $20k per year or less, no amount of “spending less” will truly prepare you for the future
There are also a myriad of ways you can increase your income. You can create passive income streams. You can ask for a raise. You can pursue a higher paying job in a different field. None of these are easy. Not by a long shot. However, neither is saving money. If you’re willing to spend the time to set up an automated savings system, it should also be worth taking a few extra hours to teach yourself a new skill.
Of course, I don’t want this to come off as callous or overly simplistic (in fact, that’s exactly what I’m trying to argue against!). There are systemic and economic issues that make climbing your way to financial stability difficult or even impossible for some people. However, personal finance is more than just math. It’s about your mindset. Reducing your expenses is just one of the three pillars of improving your financial life. Increasing your income and learning how to invest—not just investing your money, but investing in yourself—can be far more important than cutting down your bills, and they’re much harder to learn.
Illustration by Tara Jacoby.
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