“Spend Less Than You Earn” – Useless and Unhelpful Financial Advice
If you’ve ever read five words about personal finance, they were probably “Spend Less Than You Earn”. It is popular because it is simple. It’s actually too easy. This is the smallest piece of a large puzzle with many challenging pieces. It’s time to teach them.
What’s wrong with “spending less than you earn”?
Before I go into the issues with this advice, I want to point out that I don’t think this advice is wrong . You make X dollars a month and spend Y amounts. If Y is greater than X, you won’t be able to pay bills, save for the future, or repair your car if it breaks down. I think we can all agree that this is a bad lifestyle.
The problem with this advice is not that it’s bad, but that most people already understand it instinctively . This does not mean that everyone knows how to follow it, but instinctively we understand it. Why not? This has been hammered into our heads since kindergarten. “If Billy has 10 apples and he gives 12, how many kneecaps will Billy break the moneylender?”
On the other hand, life is less intuitive than simple subtraction. Between social pressures and the inevitable difficulties associated with improving your career, it’s easy to fall into a hole without even knowing it. Sometimes irresponsibility leads you to this, but more often life gets in the way. An unexpected car bill ruins your savings plan for six months. You lose your job when you need health insurance. Not to mention, the “spend less than you earn” advice rarely takes into account the opportunity cost. While you stay at home with Netflix, your coworkers can be at the network bar making connections that will give them a better job.
If you have a $ 10K credit card debt that you spent on gadgets and toys, then yes. You need this advice. On the other hand, if you’re buried under a mountain of student loan debt or your credit cards are out of control because your car sucks, “spending less than you make” is smart, sarcastic, and useless. Choices can sometimes be tricky, and this advice often ignores it.
Sometimes you need to spend to earn more
Part of the problem with “spending less than you earn” is that a lot of other advice directly contradicts it. For example, when I graduated from high school, I received one piece of advice that I took to heart: Every man should have a suit . This advice is made with the best of intentions. No one wants to be unprepared for unusual events, and good looks can make all the difference during a job interview. There was only one problem: I had no money for a suit. My first job, like many millions of Americans , was at Walmart. Even a cheap suit would take a week to get a suit. And of course, while a suit would help me impress potential employers and blend in with networking events, I couldn’t justify the expense.
Whether we realize it or not, life is full of these little choices. Competition in the labor market, constant communication with the environment, building relationships or starting a family all entail huge costs in small increments over time. While hardcore prudes will tell you that you don’t have to buy whatever your peers do (and they are right), these sacrifices often come with a social cost. In a previous article, I mentioned buying a smartphone on credit when I was broke , which is a terrible decision. On the other hand, without him, I would not have been able to start writing about Android, and this was the beginning of my career. Whether we like to admit it or not, having more things can give you more options. In my case, buying a phone was better than buying a suit because it helped launch my career. For some, a suit might be the best choice. However, in almost all situations, there are times when buying something can give you an edge.
This may sound frivolous, but they build up over time. Your wardrobe , your gear, and your options can be worth the money. Instead of spending less as an absolute rule, you need to learn how to invest in yourself . Investing, as a principle, is to spend money now in order to get rich in the future . When your budget is tight, try treating your expenses as an investment and assessing how well they will pay off over time. Will emptying your wallet pay off on Steam sales? Will there be a costume purchase? Or a smartphone? Sometimes the answer is yes, but it is helpful to have a plan for how this investment will improve your position in the future. However, it is useless to condemn any purchase just because it is spending poorly.
Spending less doesn’t help if you’re already broke
It is generally accepted that as long as you have a home to live in, non-ramen food, and any kind of entertainment, you have some expenses that you can reduce. This assumption is rather crude and suggests that people with less money don’t deserve to decide how well they live, eat, or play, but we’ll put that off for a while. The bigger problem is that, in many cases, money problems stem from the fact that spending less is not an option at all. There are many scenarios that can lead to someone not being able to balance their budget by cutting costs alone:
- Unbearable housing costs: As news site Vox recently discovered, a minimum wage earner cannot afford a one-bedroom apartment anywhere in the United States that costs less than 30% of their income. In 2013, according to the US Bureau of Labor Statistics, 4.3% of hourly workers received the minimum wage or less. Of course, this doesn’t count for those who earn just a little more than the minimum, work multiple jobs, or live with roommates. However, it’s easy to see how housing costs can eat up even a hardworking worker’s budget.
- High student loan debt. Student loan debt is becoming an increasingly serious problem, not only because it burdens human finances, but also because it is usually necessary to improve your career. In 2013, the average student loan debt was close to $ 30,000 . With a ten-year term, monthly student loan payments can range from $ 200 to $ 500 per month. Of course, this assumes that you will spend ten years paying them off, which will cost even more in the long run. If you are looking to save on interest, you run the risk of your student loan payment approaching your rent in many areas.
- Unexpected Medical Expenses: You can keep your rent below 30% of your income, dine out only twice a week, and miss every Steam sale you see, but unexpected medical expenses can still ruin your finances. As reported by CNBC in 2013 , medical expenses were the No. 1 cause of bankruptcies in the United States that year, affecting nearly 2 million people.
- Snowball of Municipal Violations: For many people, getting a ticket for something insignificant, like a late registration of a car, can start a cycle that costs a lot of money. If you’re not getting a comfortable paycheck, a traffic violation fine that costs a couple hundred dollars can spiral upward due to late fees, higher insurance costs, or lost hours of work. John Oliver has masterful explanations of how minor municipal violations can wreak havoc on someone’s finances.
Individually, any of these scenarios can cause a huge headache for someone’s finances. If you are below the middle class , even one of them can deprive you of the ability to effectively save money for years to come. This does not mean that cutting costs is pointless . If your rent costs are 40-50% of your salary, then every dollar you don’t spend on a movie is a dollar you can spend on better food. However, you cannot achieve financial independence by cutting coupons alone. It won’t hurt, but it’s not enough.
Saving is important, but not enough
More often than not, when someone says “spend less than you earn” (outside of any other context), they are really just talking about “spending less.” However, spending is just one of the two numbers you use to define your financial gap . So far, you can only cut your costs. On the other hand, there is virtually no limit to increasing your income. Of course, making more money is much more difficult, especially if you are already in dire financial straits. It is also quite often the only solution that works for a long time. If you make $ 20K a year or less, no amount of “less spending” will prepare you for the future.
There are also many ways to increase your income. You can create streams of passive income . You can ask for a raise . You can get a better paying job in another field. All this is not easy . Not at all. However, neither one nor the other saves money. If you’re willing to take the time to set up an automated savings system , it’s also worth investing a few extra hours to learn a new skill .
Of course, I don’t want this to sound pointless or overly simplistic (in fact, this is exactly what I’m trying to argue against!). There are systemic and economic problems that make the ascent to financial stability difficult or even impossible for some people. However, personal finance is about more than just math. It’s about your worldview . Cutting costs is just one of three ingredients for improving your financial life. Increasing income and learning how to invest – not just investing money, but also investing in yourself – can be much more important than cutting your bills, and are much more difficult to learn.