Earning More And Spending Less To Achieve Financial Independence, The Order Matters

Earning More And Spending Less To Achieve Financial Independence, The Order MattersThere are two main factors in building wealth, earning and spending.  It seems a majority of bloggers and influencers in the personal finance space focus heavily on frugality and spending less as a way to accumulate wealth or achieve financial independence. 

There’s an endless number of posts and podcasts about saving money, but way fewer about earning more, especially at your day job. 

As I discussed in a post I did about earning more, it’s partly because jobs and careers are extremely diverse, and advice or tips for one job might not be applicable to others.  But we all buy food and clothes, so it’s easier to give advice about saving that’s universal.

Some take issue with this focus on frugality.  No other than J.D. Roth did a post back in February about the topic, and he argues that “you won’t get rich by pinching pennies alone”.  I’m a massive J.D. Roth fan and I fully agree with him and his post. 

But his main point is that frugality and saving money is not your path to wealth if you have a low income.  I agree, in that case you should focus on increasing your income because you can only save so much when you don’t have much to start with. 

But what about those high income earners?  They already focused on earning more and achieved it, so how did that work out? 

 

Who’s In Debt?

When thinking about this post I was planning on showing the DTI, or debt-to-income ratio, of the richest counties in America.  Yes, they’re just as high or higher than others in general.  But the best DTI ratio data from the Federal Reserve tracks all debt, including mortgages. 

Many, including me, would argue that mortgage debt is the “best” kind of debt in most cases, especially in the past 10 years while interest rates have been so low.  That’s an argument for another post. 

Most American debt is in home mortgages:

Earning More And Spending Less To Achieve Financial Independence, The Order Matters

So let’s just talk about the worst kind of debt, consumer credit card debt.

A recent CNBC article cites that credit card debt is worse for those with high income.  It says:

Americans have $830 billion in credit card debt as of the second quarter of 2019. The average American now carries a credit card balance of nearly $6,200….  And U.S. adults with a net worth of $100,000 or more are more likely to carry credit card debt than those with fewer assets.  In fact, those with a net worth between $100,000 and $199,999 are the most likely to carry credit card debt, followed by people with a net worth between $200,000 and $1 million.

 

Remember that households with a net worth of over 100,000 are doing better than most.  The median net worth for all American families is approximately $97,000.

So what did earning more result in?  More consumer credit card debt.

Another article from CNBC cites a Salary Finance survey that found nearly 1 in 3 American workers run out of money before payday – even those earning over $100,000

 

Earning More And Spending Less To Achieve Financial Independence, The Order Matters

 

Look at the chart above, it spikes back over 30% for those earning over $200,000 a year!  I can imagine a hard working school teacher reading this right now who might make around $50,000 a year with their jaw dropping, wondering what it must be like to earn over $200,000 a year. 

Turns out when people get to that level they have a great chance of living paycheck to paycheck anyway.  Why?  Lifestyle inflation, and they can’t spell frugality.  Spending less is just not in the equation because they never learned how to do it.  

People in the highest 10% of annual income in 2018 had an average credit card debt of $11,200, according to Census and Federal Reserve Data

How many doctors get out of medical school with massive student loan debt, but then justify a big house and expensive cars after they start making doctor money?  They focused on earning more by going through eight or more years of medical school and residency, but they have yet to focus on frugality. 

My friend Jimmy at at Physician Philosopher lays out a nice comparison between two hypothetical doctors leaving residency and starting their respective careers.  I suspect the first Doctor, Dr. Jones, is the norm. 

And we don’t need to be reminded of the countless famous athletes and movie stars who started earning more at a very young age, only to blow it all and go bankrupt.  

 

So What’s Your Point?

My point here is that if you just focus on earning more the data show that you will likely just spend it.  Because that’s how we roll in America.  Worse yet you will be more likely to even spend what you don’t have, as the consumer debt data show.

When it comes to the two factors in building wealth, earning more and spending less, the order mattersYou must first learn to spend less, save money, and avoid lifestyle inflation.  Or your increased earnings will likely be for naught. 

Those increased earnings will probably get you a $4,000+ square foot house, a massive cartoon SUV, and lots of stuff you think you “need”.  That’s what the data show. 

I’m not advising that you not strive to earn more money.  I’m simply stating that it’s imperative that you learn to avoid lifestyle inflation and cultivate good frugal habits either before you start climbing up the earnings ladder, or while you’re in the early stages of your journey. 

Because if you wait until later to focus on spending less, you might be stuck with a huge house you don’t need, a fleet of depreciating vehicles, and an eye-bulging credit card balance that got you nothing but frivolous stuff. 

That’s what solely focusing on earning more might get you.

The data of the behaviors of so many in America are clear, earning more without first learning how to spend less will probably get you nothing but more stuff and more debt. 

 

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Dave @ Accidental FIRE

I reached financial independence and semi-retired in my mid-40's through hard work, smart living, and investing. This blog chronicles my journey and explores many aspects of personal finance including the psychological and behavioral factors that drive our habits.

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39 Responses

  1. Couldn’t have said it better. Not only in the US btw. Virtually everywhere around the world. I have coworkers who have been making 6 figures for a VERY long time and probably can’t sustain themselves more than 2-3 months without a paycheck.

    That’s just insane in my opinion.

    • Dave @ Accidental FIRE says:

      One a 6 figure salary – barring medical issues or other unforeseen expenses – that’s ridiculous. You can get by easily and save on that even in Manhattan, as the Luxe Strategist clearly shows.

  2. Xrayvsn says:

    Lifestyle inflation is definitely the norm for most doctors who justify going wild after residency after all those years of deprivation (and some don’t even do that during residency).

    I think you get more bang for your buck by saving than earning more. Every $1 saved is a $1 increase in your net worth. Every $1 earned can only potentially increase your net worth by $0.63 at the highest tax brackets

    • Dave @ Accidental FIRE says:

      That’s why I included Jimmys post, he covers the doctor situation well with that “tale of two docs” story.

      I love the way you just laid that out though, savings have a higher margin of benefit per dollar.

  3. Chris says:

    Good article. We have found what you wrote to be true in our experience. On last big push to retirement and live way below our income.

  4. Aaron says:

    I can say that lifestyle inflation is real and can be hard to push back against – We do our best and continue to save towards the future and spend prudently. Good article as always.

  5. it’s an easy trap to fall into and it smells to me like it relates quite a bit to the company you keep. i’m glad when we were making two solid middle class incomes with no kids we kept mostly to hanging out with the down and out rock n’ rollers. sure, we did a few nice things but most of our closest friends are not especially spendy on the big stuff.

    here’s the other big thing i recall. when i got my present job 15 years ago i was underemployed for a couple of years at pretty low paying jobs. i was thinking “if only i could make about X we would have a comfortable life.” well the job i landed paid quite a bit more than X but once we got our e-fund set up and travel dollars i don’t think we ever spent above that X to this day. do we seem like we’ve lived a deprived life? we have the few nice things that matter to us.

    • Dave @ Accidental FIRE says:

      yep, I think you’re right about the company you keep. we both grew up in “down and out rock n roll” company, haha, and I think that ingrained some lessons. It’s really great to be our special flavor of “deprived” isn’t it?

  6. The order really matters. We’ve been frugal from the start so this FI journey wasn’t a huge struggle for us. We didn’t have to change a ton to make progress.
    The US culture here is bias toward earning more and spending more. We’re already pushed to earn more. Living frugally is going against the grain. If you learn that first, the rest of the journey is way easier.

    • Dave @ Accidental FIRE says:

      Amen Joe, and I hope this pandemic experience starts to bring the US culture of earn-more spend-more to a hard look in the mirror. I actually have my doubts, but the optimist in me wants to hold out some hope.

  7. DenverOutdoorsGal says:

    You must have read my mind. Several days ago, they interviewed these folks in their kitchens that said they were going bankrupt. They appeared to be middle class earners but you should have seen their kitchens. Granite countertops, stainless steel appliances, custom cabinets, and etc…It just didn’t add up. Here I am in my 1968s kitchen and scratching my head… 🙂

    • Dave @ Accidental FIRE says:

      First off, my sincere condolences. Everyone knows there’s folks out there like you barely surviving with 1968-type kitchens, but it hits home when you hear a real story. How you get by is beyond me and I have tremendous respect for those such as yourself who can persevere with so much depravity and suffering. If we could only figure out a way to get granite countertops to every single kitchen in America, we could stamp out this poverty. But I’m not holding my breath, it’s just a dream. All we can do in the meantime is contribute to charitable causes that seek to help folks like you who have to get by with quartz, or God forbid laminate counter tops. Best of luck.

      😉

  8. The unfortunate reality for most folks is the more they earn, the more they spend. I didn’t realize just how much debt on average they incurred – very insightful!

    Hey, I completely renovated my kitchen several years back. Saved a bundle by doing it myself and choosing laminate counter tops. Now I feel like a cheapskate that should have gotten granite so I could be like everyone else 🙂

    • Dave @ Accidental FIRE says:

      The consumer credit card debt for folks at those income levels is ridiculous. Congrats on the kitchen, and we will all say prayers that you survive your laminate counter tops 😉

  9. livingwellfinance says:

    Yes, as your income goes up and if you’re in a career where your perceived status is important, it becomes very tempting to spend more. Although I now have a high-income from working as a work-from-home engineer (I was working from home for years before the coronavirus pandemic), it was alot easier for me to be frugal as I didn’t have to worry as much about my status and image. But it also really helped that I’ve practiced frugal spending habits at an early age

    The Millionaire Next Door also does a good job mentioning how people with high salaries like doctors and lawyers still don’t save much because they have to spend so much

    • Dave @ Accidental FIRE says:

      “Status and image” games to me seem so shallow and meaningless. But having learned enough about human history especially from an anthropological perspective I understand how they came about.

  10. Pete says:

    As a higher income household, I still can’t fathom how higher income households run out of money before their next paycheck. Seems we always see things we can’t quite have and try to figure out how to have them anyway. Make 80K a year, sure, buy a boat. Make 120K a year, sure, buy a horse. Make 200K a year, sure, buy a cabin. No thanks to all of those, please and thank you.

    • Dave @ Accidental FIRE says:

      Yep, and I live in an area where virtually all household have incomes in the 6 figures. The cars and useless expensive crap you see around here are depressing.

  11. Hey Dave,

    I am very risk-happy, but one area where I’m super conservative is lifestyle inflation. Once you start enjoying nicer things, it’s really hard to downgrade, so I’m very mindful about not locking myself into expensive monthly outputs. It’s taken me over 10 years to even pay a “normal” amount for furniture. I’d say that in order to truly enjoy luxuries in life, the debt free way, you actually have to really have your money act together.

    I think for me, what really was key when I was earning less was never believing that I needed “more”. Whatever money I had I was going to build my life around it. The mindset of never believing that I didn’t have enough was huge for me.

    I had someone ask me why wouldn’t they inflate their lifestyle if they have the money, which made me think. To me, the default should always be spending no money. Not unless you have a good reason to. I still don’t believe in spending money just to spend!

    • Dave @ Accidental FIRE says:

      Frankly the amount you save living in NYC with the lifestyle you live, you amaze me 🙂 I like that thought – “the default should be spending no money”.

      You’re very popular for a reason, keep showing the way!

  12. I think a lot of the earning more, spending more can be attributed to the hedonic treadmill, but as half of a dual career couple with kids, I also imagine that some of it is paying for an increased amount of services as career and kids take up more and more time, especially if you live in Type A cities. I found it much easier to focus on earning more, while spending less when we both moved into our own businesses (therefore had the schedule flexibility) and when our kids were older and they could take themselves places, help out more at home, etc.

    • Dave @ Accidental FIRE says:

      The dual income thing needing additional services is a huge topic and deserving of blog posts on it’s own. It can be controversial too. For instance my street is an anomaly in the DC region, most married couples with kids on my street have a stay at home parent. You hear that you can’t afford to live near DC w/out 2 incomes but it’s far from the truth. And the working parent doesn’t make an exorbitant salary. Exorbitant by Appalachia standards – yes, but not for here. In many ways the second job with the additional costs of transportation, day care, clothes, etc isn’t worth it. Financially that is. But if it takes a career for both parents for them to be fulfilled that’s another matter.

      • Financially, 2 working parents is still worth it if you view their careers as separate and not just as one household. The parent who stays home (typically the mother) takes a big hit over the lifetime of their career. Even if the first year or several show the 2nd parent just breaking even or losing money b/c of daycare, there’s the issue of how to on-ramp back and at what salary. Thee’s also the issue of long-term security and retirement, given divorce rates. I’ve been married 25 years and counting, but I also have 2 daughters and would want them to be financially independent irrespective of their spouse. (I think a lot about these issues b/c I’m in the HR/ career space — can you tell????)

        • Dave @ Accidental FIRE says:

          Yes I can tell 🙂 And it’s great to get contributions on this topic from an HR professional, I appreciate it. I agree with your analysis – if and only if both spouses feel that a career is important and are working towards one in an industry they’re attracted to. What I often see however is one of the spouses working only so they have more money to buy more stuff and keep up with you know who. For instance a close friend of mine falls in this category. He’s an architect, and his wife works as an administrator at a travel agency. She HATES her job and didn’t choose to go into travel. She didn’t go to college and isn’t really interested in working at all, but she does it because she wants them to have more money to keep up. The husband keeps telling her to quit and that they can get by on his salary, but she likes the nicer things in life. If she’s willing to go to a job everyday that she hates just to have money to get those things, that’s her prerogative. But to me it’s sad. I discuss this with him all the time and he agrees. It’s a complex issue, and everyone’s situation is unique. Thanks for sharing your expertise!

          Oh and I would add your desire to have your daughters become FI without the help from a spouse is noble, esp considering the divorce rate.

  13. Mr. Fate says:

    Great one here. I couldn’t agree more. I think it’s important for folks to understand not just frugality (or not just wantonly spending) early on for the reason you state as well as the fact that’s it helps to make people realize that “stuff does not equal happiness” which I think is even more important so they never fall into “Jones’ Traps” and chasing material dragons. My lifestyle has effectively stayed the same throughout my life even as my earnings skyrocketed. Sure, I’ve bought houses, cars and splurged on some amazing things and travel, but those were primarily exceptions not lifestyle rules.

    To each their own I guess. As the up and coming ball player, Nuke, in Bull Durham once said, “I’m not pissing my money away, I’ve got a Porsche with a quadraphonic Blaupunkt.

    • Dave @ Accidental FIRE says:

      Ha, great movie, I need to watch that again. A sporadic splurge here and there – especially after you’ve built wealth – is good. I’ve done it too. But you have to show you can build the wealth first. The splurge just serves as a reward after that.

  14. I went through a period of lifestyle inflation in my 30s, at a time when I was making good money and spending (lots of) it on household items. (In my 20s, I was basically a nomad with very little belongings.) Despite the good income and good prospects for having a career that would likely net me a lucrative salary for as long as I wanted it, at the end of my 30s, I decided to finally finish up the degrees I’d always wanted to get and move into a field where I knew I would make a lot less money but interested me a lot.

    So I became a starving student after my savings ran out (it took two years), and then it was another three years before I finished my Master’s degree and got my first job in my new field. I got into debt while going to school, and my salary at first was like a fourth of what I used to make. It took me eight years to pay off all my debt (except a mortgage on a three-flat) and make a decent salary. The first four of those years, I didn’t make enough to pay my living expenses and service my debts unless I was extremely frugal. In the fifth year (Y5), I reached a point where some of my debt was paid off and my salary had risen enough that I could start figuring in expendable income in my budgets.

    I starting taking half of whatever increase in income I received and increasing my savings (retirement and savings account) and let myself use the other half as I wanted. In Y5, the new amount was laughably small, and it didn’t really allow me to be anything more than just be frugal instead of basically a tightwad who had to count every penny. But through time, my debts were all paid off and my income continued to rise; in Y7 of the plan I found that I didn’t even want to spend 50% of any new income on what were basically luxuries. So now I save (investments and savings) almost 50% of my take-home pay and keep my expenses fairly low on what is still a significantly lower income than I earned before my career change.

    It was a good template for me, and it got me from under-earning to being comfortable and basically debt-free. It allows for the occasional splurge, and that’s enough for me. But I’m much happier leading a simple life. So is the planet, in some tiny way.

    • Dave @ Accidental FIRE says:

      Wow thanks for sharing your story… sounds to me like you took a lot of risk but it paid off – that takes guts. Kudos on going with what you really wanted to do. And along the way you learned that the simple life without all the stuff is the best life. What a great story!

      • Thanks! It’s really funny how easy it sounds above, but the adventure was more than just a straight path from point A to point B. There were lots of moments of uncertainty, self-interrogation, frustration, and impatience. I guess no important life project is without them; I think we tend to leave out those parts when we tell our stories…

  15. drmcfrugal says:

    It’s interesting. Just today I had a conversation with my wife about one of her friends who is completely financially irresponsible. She is deep in credit card debt and never realized what an APY is and that she had to pay it back. It was shocking to me but it made me realize that there are probably many people just like my wife’s friend. It’s unbelieveable.

    • Dave @ Accidental FIRE says:

      Wow, I’d like to say that’s unbelievable but the more stories like this you hear it’s obviously more and more believable. So sad.

  16. Hrishikesh Kulkarni says:

    Fully agree with you.
    A slightly pedantic point is that this rule, about the order mattering, tends to break down on the extremeties.
    J.D Roth pointed to the low income extreme. Similarly, you would be hard pressed to find a significant bunch of people who fail to get rich after earning a milliondollars a year, no matter how profligate spenders they are.

    • Dave @ Accidental FIRE says:

      I agree, although there are quite a lot of famous athletes and celebrities would earned millions and spent it all and went bankrupt.

  17. Lifestyle inflation is a definite. Earning more often means more expensive vacations, cars, food, etc. Higher income earners have more credit card debt out of choice. Lower income earners out of need.

    • Dave @ Accidental FIRE says:

      So true, and here in the DC region where incomes are very high I see it all around me, every day

  18. Andrea says:

    I’ve tried really hard to avoid lifestyle inflation because it’s an easy thing to fall into. The trick that has worked for me over the last 5 years or so is that whenever I get a raise, I challenge myself to decrease my spending by the same amount, effectively doubling my raise in terms of the increase to my savings. It’s getting a little harder to achieve now that my expenses are so low and my income has risen quite a bit but it’s a good challenge to go through because it makes me re-evaluate what’s important to me at least once a year and slash any spending on things that aren’t important to me or find cheaper ways to do or get what I need or want.

    • Dave @ Accidental FIRE says:

      That’s a sweet hack and puts things on steroids – cut spending with a raise. I love it. I used to just maintain and even that was enough to get way ahead.

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