If you have a pile of debt you need to clear, is it better to increase your income or cut your expenses? Obviously either can be a big help, which is why they are both included in Debt Camel’s Toolkit for Improving Your Finances. But I asked two of my favourite personal finance bloggers in Britain to write about which approach feels more important to them.
Jane Clark is the blogger behind Frugal Queen, where she writes about budgeting and saving money.
Learn to live on less and have a lot of fun whilst doing so
Frugal has so many connotations and most of them seem to conjure up suffering of one sort or another. I want to present a whole new frugal that’s savvy, eats well whilst being warm and cosy and never pays full price for anything.
The days of plenty are over – food and energy are never going to be cheap again! The rich work their money hard and turn a pound into five … those of us who aren’t rich can perform the same trick by buying supermarket value brands and turning them into simple, tasty, homemade meals. We all have to learn how to stretch every pound. We need to share our cooking skills, our thrifting skills, our gardening skills and our craft skills. We are the modern day survivors!
We all need to earn money and there are those who have the skills and acumen to earn a lot of money, I should know I was one of them. I had a management position, earned plenty of money, never saw my family and brought home a whole load of stress along with the pay cheque. I wanted out but there was one catch. We owed £45K of personal debt and we were tied to jobs we didn’t enjoy until every last penny was paid back.
Sure we had to keep earning money and increase our income whilst we did that and no one will pay off that amount of debt as quickly as we did unless you bust a gut doing so. How we paid it back is all part of our history that made us who we are today. We now have average incomes and still save a third of our income, use another third to shorten our mortgage so it will be paid off in four years and pay extra into our pensions. Doesn’t sound much like darned socks and going without, does it?
As savvy spenders, we make sure we pay the very best price for everything which still means if we need a new coat we have one. If I want my hair done then the village hairdresser will do me fine and I don’t need the same cut and colour for three times the price somewhere with chilled Prosecco and a fancy reputation.
We’ve learned to live with a lot less and have a whole tonne of fun whilst doing so. I learned to sew, quilt, make soft furnishing and have refurbished our 1900’s cottage tastefully while spending very little money doing so. When we downsized we set about making our home as comfortable as possible whilst spending as little as possible. The results are far from spartan and there’s not a hair shirt to be seen anywhere. We haven’t compromised our social lives and love to have dinner parties and yes, we keep to a budget there too.
We’ve got to know the local butchers, know what’s seasonal and where to buy it locally and affordably. We can dress really well as we know so many people buy clothes that they never wear just to put them on ebay for us to look smart in. We holiday annually by booking an apartment direct with the owner, getting a 15% cashback through Quidco and booking a ferry with a discount code to get a 10% discount. Still think that being thrifty and frugal is about cold showers and dirty clothes? It certainly isn’t in my world of savvy spending.
The greatest part of our thrifty life can’t be measured in financial terms. The greatest thing we’ve gained is a quality of life from being less stressed. We are healthier as we eat home cooked seasonal food, exercise more and have a greater sense of well being as we have more time for family and friends.
Of course we all need money, but you are truly rich when you know you have enough.
Maria Nedeva is the owner of The Money Principle where she teaches people in financial trouble how to build sustainable wealth.
Why increasing your income trumps cutting expenses
People will tell you it’s much easier to cut your expenses than increase your income. People will tell you if you cut down the lattes you wind up a millionaire.
Don’t believe it! Have your latte and enjoy it if this is what rocks your boat. I never say ‘no’ to a high quality espresso and a nice slice of cake!
Why listen to me? I flipped my finances in five years: from £100,000 consumer debt to £100,000 in new savings and investments. And still going strong.
Do you think this happened by giving up my lattes and counting how many sheets of toilet paper my kids use? No, it didn’t. (Though I do find it annoying when my son leaves the lights on or uses a whole toilet roll at once.) We managed by increasing our monthly, after tax income by 80% over the last five years and rationalising our spending by using the ERR Money Management Strategy so that we don’t waste.
So why is increasing income better than cutting expenses?
1. Your income knows no limits. While your income is unlimited, cutting expenses always has a very clear limitation: you can never go below what you need to keep alive. Your income, once you go beyond selling your time at the basic rate, is truly unlimited. You can build your skills and charge more for your time, you can build reputation and charge what the market will take for it.
2. Increasing your income makes for a better you. To increase your income you need to hone your craft, change your mindset, and seize opportunities. Oh, and learn – learn a lot, learn different things and learn continuously. This is a lot of change that will bring about a more confident and happier you.
3. Increasing your income, expands your life. Saving a high proportion of a high income is the way to go. This way, you can work towards your financial health and enjoy life to the full. And I’m not talking about wasting money; I’m talking about enjoying a concert, a nice dinner with your partner, attending courses, jumping out of an plane or running marathons – life is about unique experiences that bring you joy.
4. To increase your income, you contribute value. Most of your increased income is likely to come from contributing value to people’s lives. If you give more than expected at work, you’d likely get a pay rise (and promotion). If you spot a problem many people share and solve it, you build a successful business. This feels good and is good for everyone: economies prosper by many people contributing much value.
5. Increasing your income requires less effort than cutting expenses. Building income on top of your job, from side jobs, a small business or passive income streams, reaches a tipping point after which this income can be maintained and increased with very little effort. This is not the case when you cut expenses; in fact, the closer you are to the absolute minimum to which you can cut expenses the harder it is to maintain this level and to cut further.
6. Increasing your income brings security. When you have high income, you can have high positive cash flow and could get away with lower emergency fund. And you’ll develop so many competencies and skills that you could always survive – knowing this is very comforting.
7. Increasing your income is fun! Well, it is fun after you get over the initial hurdle of fear.
This is why I believe that increasing your income trumps cutting expenses any time. When you find yourself in financial trouble, cutting expenses can be useful to stabilise faster but it won’t solve your money problem. Increasing your income while making your money go further will!
Reading these two pieces, what struck me was the emphasis both Jane and Maria put on fun and new skills … I think they will both like the Franklin D. Roosevelt quote:
Happiness is not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort.
What do you think?
Is it clear which will work best for you, or is it a bit of both?
Do you think your views will change once you have paid off most of your debts?