There Are Two Guaranteed Ways To Improve Your Financial Situation … But Which Is Better?

Quite often on this site, I mention that the one true path to financial success is to spend less than you earn, and the greater the gap between your spending and your earning (with the earning being the larger one, of course), the better shape you’ll be in.

This phrase, of course, means that there are really two directions you can take to improve your financial situation.

The first method is to spend less; in other words, live frugally. Cook your own food. Shop more effectively. Be more energy efficient. Buy late model used cars instead of leasing or buying new ones. Pay down your debt (so you’re not spending money on interest). I often talk about this method because many of these techniques are applicable to a lot of people – everyone can get some CFLs and put them in the light sockets to save energy.

The criticism that frugality draws is that it’s not cost effective or that it reduces quality of life. This criticism is often true, in fact, for many people – if you’re working two jobs, it might be justifiable to eat a McDonald’s double cheeseburger instead of eating at home sometimes. The real power of frugality, though, is in looking at things a different way: is that double cheeseburger really cheaper when you consider everything (time, health, cost of ingredients, quality of ingredients, etc.). Most of the time, spending less is mostly a matter of looking at your own life.

The other method is to earn more, and this is the one that’s more difficult to discuss in a way that a lot of people can use. Why? Often, these moves are more strategic in nature and can more easily backfire. You can work hard to get a promotion at work, but that promotion might mean a lot more work. You can switch jobs for more pay, but the environment might be worse. You can ask for a raise, but it might sour your relationship with your boss. You can start a business, but that business could be a giant time sink without much financial reward. You can make an investment, but then the stock market might tank.

However, earn more often has much bigger rewards. If a side project takes off, it can make a huge impact on your income. If you make a well-planned investment, the money you already have will multiply like rabbits. If you get even a small raise at work, it often results in a much larger gap between what you spend and what you earn. But what do these all have in common? Earning more often requires relating to others.

So which is better? If you’re blessed with good social and communication skills, it’s probably easier to earn more money than to spend less money. This is why I spend a lot of time reading about and blogging about communication, personal development, and personal productivity – those are the best tools for increasing what you earn. However, it pays for everyone to look at ways to reduce their spending. Even if you think a particular idea is foolish or not for you, if it has the potential to reduce the money you spend (or can reduce the money that someone spends), you’re making a mistake by discarding it right off.

So what can you actually take home from this? If you need change now, spend less. Look for frugal techniques that you can apply in your life, then focus on paying off debt. When you’re on a steady playing field with your finances in order, that’s the time to look for ways to increase your income, because if you’re already living a stable lifestyle, you can afford a bit more risk for a bigger reward in your life.