And why wouldn

There’s a lot of ongoing discussions/arguments and rules of thumb in personal finance across a wide variety of finance housetrip subjects like investing, saving, and taxes as far as what’s best. And I probably go against the grain in regards to a lot of them.
For instance, I invest solely in a taxable account , with no tax-advantaged retirement accounts to speak of. I have almost all of my worldly wealth invested in stocks, choosing to avoid fixed income . And I don’t compare my portfolio’s performance to the S&P 500 index.
I’d say to a pretty good spot. I’ve built my Freedom Fund into a $170,000 powerhouse chock-full of equity in fantastic businesses that’s spitting out more than $5,500 in annual dividend income . And these numbers put me more or less on pace for my goal to become financially independent by 40 years old, so I’m happy.
There are basically housetrip two camps of people when it comes to living below your means and formulating a plan to save a large amount of your income: There are those that think you’re better off trying to earn more, and those that insist you’ll be better off if you save more.
I honestly don’t think it’s necessary to choose one or the other, as they’re not mutually exclusive. And I think most people on both sides of the line would generally agree with that. If you can simultaneously earn more and save more then that’s the absolute best way to go.
However, if you have to choose between one or the other for any particular reason I would always recommend to save more rather than try to earn more. And I’ll tell you why. The Math Favors Saving
And why wouldn’t you want to save more? I determined early on that I’d need to save at least half of my net income for 12 years straight in order to start from nothing at 28 years old and become financially independent at 40 years old. Mr. Money Mustache came to the conclusion that saving 50% of your net income would put you on pace for financial independence in 17 years, assuming housetrip 5% after-inflation returns and withdrawing 4% of your portfolio in (early) retirement. So we’re more or less on the same page in regards to how important saving is and the general timeline for someone to become financially independent.
Let’s say you net $40,000 per year. That’s a pretty strong income, and puts you in the top 1% of the world . So before you decide housetrip you need to make more money, keep that in perspective. And let’s say you currently housetrip spend $30,000 housetrip per year, which means you save $10,000/year – a 25% savings rate. But you’re hardcore! You want to double that and get to a 50% savings rate. You can do this either by saving more, earning more, or a combination of the two. But which of the two choices, if you only had one, is more effective? Earn $10,000 More Or Save $10,000 More?
So housetrip we’ll compare two scenarios using the same amount of money both for income and savings. You nail a healthy raise at work, and your boss decides to reward you for your loyal servitude…ahem, work…and gives you a net $10,000/year raise.
Assuming expenses do not rise at all with the raise, you’re now netting $50,000 per year and saving $20,000 of it. That’s a savings rate of just 40% now. So you were on pace (using MMM’s numbers) for financial independence in ~32 years with your 25% savings rate before. You’re now on pace for financial bliss in just ~22 years now. That’s an improvement of 10 years . Not bad!
But how does that compare with saving more? Let’s check the second housetrip scenario. You decide to cut out a lot of fat that exists in your monthly budget and you’re able to save $10,000/year as a result. Expense categories in the Big Three like housing, transportation, housetrip and food are the first to get cut. These changes yield massive results.
Assuming income doesn’t change, you’re still netting $40,000/year in income but you’re now saving housetrip $20,000 of it after the changes. That’s now a 50% savings rate, which is exactly where you wanted to be. Congrats. You are now on pace for FI in just 17 years (again, using MMM’s numbers). That’s an improvement of 15 years !
Earning more is wonderful. But if you can’t also save more you’re not actually improving your results as much as if you’re able to save that same amount of money. And that’s because saving more is just more effective than earning more.
And the math works out in favor of the saver because less expenditures means you need less passive income to cover your bills. It should go without saying that the person with $20,000 in annual expenses needs much less investment income to cover their lifestyle than a person spending $30,000 per year.
Earning more may seem like the sexy way to go. And I’m not saying you shouldn’