Given an option to secure your financial future, would you rather earn more money or cut back on expenses? Most people would say “more money, yo!” but the truth may surprise you.
More money sounds better. With more money comes a greater ability to save and invest, right?
But cutting spending can actually be more powerful than simply increasing your income.
There’s a couple of reasons for this.
First is a phenomenon called “the goldfish effect”. Goldfish will grow to the size of their current enclosure (assuming healthy water, ample food, etc.) So, move a goldfish into a bigger bowl and it’ll grow to the size of its larger home. The simplified explanation for this is that the goldfish will eat more food – it’s got more room to frolic!
The lesson from the humble goldfish can be applied to personal finances. There’s some evidence suggesting that earning more money results in a higher level of proportional spending – otherwise known as the marginal propensity to consume. Two economists Atif Mian and Amir Sufi, discussed this on their blog and their analysis showed that for most people, spending does increase with increased income. This is especially true for people who initially come from lower incomes.
In other words, most people are like goldfish when it comes to money – the more they make the more they spend. Like the goldfish, their consumption increases. Think about when you last got a bonus or a big bump in pay. Did you save that extra money or did you find creative ways to spend it?
The second reason cutting spending can be more powerful is wonderfully articulated courtesy of a great post from Mister Money Moustache where he says that every permanent drop in spending has a twofold bonus:
1) you’ll get an increase in money to save and invest
2) you’ll permanently decrease the amount of expenses you’ll need to live
This intuitively makes a lot of sense. You’ll get a double benefit of having more money to grow your wealth and needing less to enjoy life.
What about increasing your income AND reducing your expenses? Well, then you’d be golden and would likely be ahead of the curve. It’s a good habit to aspire towards!
Of course, what you choose to save and invest into will greatly affect your financial future. But you’ll need to sort out the basics first to see if investing is the right step for you and a great way to tell is by taking our free Financial Health Check.
So there you go. Mo’ money really can to lead to mo’ problems if you don’t get your expenses sorted.
Hey, even Johnny Depp went bankrupt from excessive spending…and he made $650M over 17 years!
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