Building Wealth: Is Saving or Earning Best For Growth?
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Many people like to quote the old saying
“A penny saved is a penny earned”.
I disagree vehemently!
(You will see why later.)
Obviously, people will disagree with my disagreement.
Some people think that earning more money is better than frugality.
Others say that you don’t need to earn more to get rich.
Both sides make decent arguments.
I happen to find they each only have half of the equation covered when it comes to building wealth.
I mean, saving money is always a good thing especially if you’re saving for a specific goal like becoming a first-time home buyer.
And who would say “no” to an increase in income?
If anyone’s ultimate goal is wealth creation, you need to be doing both.
Look, I get it, it’s tough to have thought one way and then be expected to be persuaded toward thinking another way in the span of a thousand or so words.
It’s not like I’m trying to make you think differently about everything you ever knew.
I’m just asking you to open your mind when it comes to the concept of building wealth for your own financial benefit.
A Penny Saved Or A Penny Earned
Let’s start by breaking down the quote regarding building wealth by the manner in which it is used today.
“A penny saved is a penny earned” is essentially saying that if you decide not to spend a penny, or if you spend a penny less, the effect is the same as earning one.
The reason I disagree with this logic is simple:
When you save money you are preserving your wealth, but when you earn money you are adding to what you already have accumulated.
This is where the idea of doing both earning more and saving begins.
There are two steps to becoming wealthy–creation and preservation:
- When you earn more money, you are creating more wealth for yourself. New sources of cash inflows can be investment real estate, new businesses, dividends on investments, or any other side project that bring in money separate from your ordinary job income. This is where the accumulation occurs. Job income is what pays your living expenses, while the added cash flows are what add wealth.
- Saving more of your money doesn’t specifically increase the wealth you had already created. Rather, when you save money, you are only preserving what you have already accumulated. You are not better off for not spending the aforementioned penny because you already owned it in the first place. What you actually did was preserve its place in your possession.
It’s kind of like a Yin and Yang–one complements the other.
You can’t be building wealth if you aren’t adding to your existing income level.
You also can’t preserve it if you’re spending every extra penny you earn.
A Penny Saved = Preservation Of Capital
Think of it like this:
Let’s say you go to Aldi stores for your groceries…your checkbook has a certain balance in it.
When you go to pay, you have money taken out via a check, debit card, cash you removed from the ATM, whatever floats your boat in this instance to pay for your purchase.
Now, regardless of whether or not you used a coupon or got some sort of discount, your balance is still going to be less than when you started out.
If you shop using Rakuten where you get a rebate on your purchases, you still end up with more going out than coming in.
Even if you decided not to make a purchase at all, your balance at best will be the same.
In fact, your bank account will never have a higher balance than when you started out regardless of the actions you take (or don’t).
It also doesn’t matter how you are saving money:
- Cutting costs (ie: cable television)
- Using coupons
- Negotiating bills (ie: utility bills)
The point is to save wherever and however much you can.
This is why a penny saved is simply a penny saved and only part of the process of building wealth.
A Penny Earned = Increasing Capital
Now, let’s look at earning a side income (or just making more at your job).
Same scenario as before: when you go to collect payment from a renter, or a side project, your checkbook has a certain balance.
No matter how much or little you collect you are going to have a higher balance after the transaction.
Even if they don’t have the entire payment, or only give you a single penny toward the rent, you will at worst have a bit more than when you started.
When you increase your income, all other things being equal, you will never be worse off.
How you earn the money doesn’t matter:
- Starting a business
- Flipping items
- Working a second job
- Asking for raises
You just need to increase what you are bringing in.
Just like above, a penny earned is only part of the process of building wealth and requires the saving part to make it a complete process.
Building Wealth & Income Taxes
A big counter-argument involves the effect income taxes have on the equation.
One of the points made is that reporting the money on your income tax return will stunt your goal of building wealth because taxes will offset the increased income.
Or people will say something like “you can’t be taxed on your savings so it’s better than earning” (I read something like that before too).
Honestly, I have to chuckle at those theories.
Even if you paid 95% in taxes, you will always end up with more money in your pocket than if you didn’t earn anything extra.
Sure, paying taxes suck and it’s even worse if you live in an area with a state income tax.
But a logical person will look at it as being a net positive when it comes to building wealth regardless of how much you pay in taxes.
Saving ≠ Earning and Earning ≠ Saving
So, taking all of that into consideration for the goal of building wealth, saving money is not the same thing as earning money.
Saving money aims to minimize the loss of wealth while earning money aims to increase the amount of wealth.
But, one really cannot provide you as much benefit without the other.
In terms of building wealth:
- Earning money is pointless if you don’t have saving controls in place to make sure it stays in your possession, and
- Saving money is equally pointless if you don’t have anything coming in to save.
So going forward, you shouldn’t choose which side of the fence to be on.
Instead, you should have one foot solidly planted on each side.
Save where you can, but at the same time look for ways to earn more and build upon those savings quicker.
Building wealth is really a pretty simple concept.
Summing it all up in a succinct manner:
- Find ways to earn more money
- Save more of what you bring in
That’s the complete picture of building wealth in a nutshell!
Of course, putting it into practice is a totally different story, but for this, we’re only laying out the basic concept of building wealth and the need for both saving and earning.
Where do you stand on the issue of building wealth: do you think saving and earning are in essence the same? Do you think one is better than the other? Or, do you feel that they are both important pieces to the financial puzzle?
I think it’s important to save money AND earn more if a person wants to build wealth. Obviously no matter how much you earn, you won’t build wealth if you don’t save some of it. And it doesn’t exactly scream wealth to save $1 a month because you don’t make enough to save more than that.
I try to achieve a balance. I’m not necessarily trying to become wealthy – I will be happy if I can make it until I die without (1) taking on more debt, (2) running out of money, and/or (3) eating cat food. To reach those goals, I need to increase my income enough to save more money.
So basically I’m talking in circles to say exactly what I said in my first sentence. But mainly I just wanted to post a multi-paragraph comment to make up for my lack of recent comments on your excellent posts. 🙂
Oh. My. GAWD! She returns 😀 No make up needed Andrea, I’ve been a little behind too.
Your points are exactly what I was aiming to relay. I think a conscious effort has to be made on both ends to really make a difference. And, if you unintentionally become wealthy in the process, then you can always toss some of that extra $ my way, I won’t object.
I just wanted to add some words of my own so that your impressive comment looks even more impressive! 😉
I like your breakdown of the quote better than mine. As you know, I completely agree.
Ha ha. I’ve had this post half-done for a while now, and when I read yours and that one guys comment about saving a penny being better, it set off bells, whistles & fireworks in my head!
Couldn’t agree more Eric! It is a balance between earnings and savings that creates wealth. Everyone has to find the balance that works for them. Is the sacrifice worth it if you spend your weekends in the office trying to make more money while your life is passing you by?
That last part is so important Paul. The trade-off between the time put in and the rewards derived from those efforts have to make sense to the individual. There are certainly times when I feel it isn’t worth giving up my time with friends and family for a small amount of extra income, but there are also other times when I will gladly give up some “me time” when the rewards are significant.
As always Eric you make excellent points, and I completely agree with you. Saving and Earning need to be balanced and work successfully together. Otherwise, they are pointless.
Thanks Carrie! Like anything, it will take a little time to find that balance, but when you do you just need to be diligent and stick with it. Before long, the results will make all of the work very much worth the effort!
Excellent points Eric. You definitely know how to be devil’s advocate. I truly think you need to do both. You need to preserve what you make but you also need to work on expanding your opportunities and investing in the future. For me I seem to be constantly thinking of ways to make extra money. The issue I have is time and making them become a reality.
You hit the nail on the head with the time issue. It’s all well and good to come up with new income streams, but without finding the time to implement those ideas, it becomes pretty difficult.
Good points. Some point out that by cutting expenses you are freeing up more money to do other things with (such as invest to get dividends or interest) but when you earn more money you typically don’t keep dollar for dollar what you earn due to taxes and other expenses related to earning it. Yes you need both.
Thanks Marie. You’re absolutely right about the taxes, but it’s still going to be more than you had started out with. So, if you can combine the two and save most of that extra income, you are coming out way ahead!
I think that it is a lot easier (at least for me) to add $1000 to my monthly income as opposed to cutting out $1000 from my monthly spending.
I think that would be a sentiment echoed by a good number of others. Once you have a budget and lifestyle in place, it’s pretty hard to cut out certain things if you aren’t absolutely forced to. The easiest thing would be to add money and save a good portion of it rather than using it to increase your current lifestyle.
I believe one needs both earnings and savings in place to ultimately be wealthy. You cannot be wealthy is your spending is out of control. You need to save a large portion of your income for investing there is no way around it. As Cash flow Mantra said.. there comes a point were you just can’t cut your expenses any further and you need to increase earnings.
I’m in the camp that says it’s best to both increase income AND decrease spending in order to build wealth (or get out of debt, or reach whatever monetary goal you’ve got in mind.) I also think that a penny saved is not the same as a penny earned, but I think that a penny saved is actually worth MORE than a penny earned, because you’ve got to pay taxes on every penny you earn. If you’re saving a penny you’ve already got, you’ve already paid those taxes.
I’m all for anything that can speed up a process, especially when it comes to making money.
I skipped all the way to the comment after reading the first two sentences (I’ll finish reading as soon as I finish posting this comment.
I have long said “a penny saved is (a penny minus your marginal tax rate) earned.”
Earning money has always been difficult for me, my highest hourly wage ever was $8.50 and $17K is the most I have earned in a single year.
Currently I live on a poverty-level income and there’s not much potential left for reducing expenses.
Upskill -> Add more “value” to people’s lives -> Get paid for your contribution.