If you've ever read five words about personal finance, they were probably "Spend less than you earn." It's popular because it's simple. In fact, it's too simple. It's the smallest piece of a big puzzle with lots of complicated parts. It's time we taught those instead.
Illustration by Tara Jacoby
What's Wrong With "Spend Less Than You Earn"?
Before I talk about the problems with this advice, I want to point out that I don't think this advice is wrong. You make X amount of dollars per month and you spend Y amount. If Y is greater than X, you won't be able to pay your bills, save for the future, or fix your car when it breaks. I think we can all agree that that's a bad way to live.
The problem with this advice isn't that it's bad, it's that most people already instinctively understand it. That's not to say everyone is good at following it, but instinctively we get it. Why wouldn't we? We've had it beat into our heads since we were in kindergarten. "If Billy has 10 apples, and he gives away 12, how many of Billy's kneecaps will the loan shark break?"
Life, on the other hand, is less intuitive than simple subtraction. Between social pressures and the inevitable catch-22s of improving your career, it's easy to slip into a hole without knowing it. Sometimes being irresponsible gets you there, but many more times life gets in the way. An unexpected car bill ruins your savings plan for six months. You lose your job right when you get sick.
Also, the "spend less than you earn" advice rarely accounts for opportunity cost. While you're staying at home with Netflix, your coworkers may be out at the bar networking, making the connections that will land them better jobs.
If you have $10,000 in credit card debt that you spent on gadgets and toys, yes. You need this advice. On the other hand, if you're buried under a mountain of student loan debt or your credit cards have spiralled out of control because your car sucks, "spend less than you earn" is glib, snarky and useless. Sometimes choices are complicated and this advice often ignores that.
Sometimes Spending Is Necessary To Earn More
Part of the problem with "spend less than you earn" is that so much other advice directly contradicts it. When I graduated high school, for example, I got one piece of advice that I took to heart: Every man should own a suit. This advice is well-intentioned. No one wants to be unprepared for fancy events, and looking good can make a difference during a job interview. There was just one problem: I didn't have money for a suit.
My first job, like so many millions of Americans, was at Walmart. Getting a suit would have been a week's worth of work even on the low end. And sure, while owning a suit would have helped me impress potential employers and fit in at networking events, I couldn't justify the expense.
Whether we're aware of it or not, life is full of these little choices. Competing in the job market, keeping up with your social circle, and pursuing relationships or a family all incur massive costs in small increments over time. While hardcore frugalites will tell you that you don't have to buy everything that your peers do (and they're right), those sacrifices often come with social costs. I mentioned in a previous article how I bought a smartphone on credit when I was broke, which is a terrible decision. On the other hand, without it I wouldn't have been able to start writing about Android, which is what jump-started my career. Whether we like to admit it or not, having more stuff can give you more opportunity. In my case, buying the phone was better than buying the suit because it helped launch my career. For someone else, the suit might be a better choice. However, in virtually all situations, there are cases where buying something can give you a leg up.
These might seem frivolous, but they add up over time. Your wardrobe, your gear and your opportunities can all cost money. Rather than spending less as an absolute rule, you need to learn how to invest in yourself. Investing, as a principle, is about spending money now to enrich yourself in the future. When your budget is limited, try to view your expenditures as investments and gauge how well they will pay off over time. Will emptying your wallet on Steam sales pay off? Will buying a suit? Or a smartphone? Sometimes the answer genuinely is yes, but it helps to have a plan for how those investments will make you better off in the future. However, shaming any purchase just because spending is bad isn't helpful.
Spending Less Isn't Helping If You're Already Broke
It's generally assumed that, as long as you have a home to live in, non-Ramen food, and any entertainment activities, you have some kind of expenses you can cut. This assumption is pretty crass and presumes that people with less money don't deserve to decide how well they live, eat, or are entertained, but we'll set that aside for the moment. The bigger problem is that, many times, money problems occur because spending less isn't an option at all. There are numerous scenarios that could lead to someone being unable to balance their budget through spending cuts alone:
- Unbearable housing costs: Federal treasurer Joe Hockey tried to argue this week that all you needed to buy a house was a good job with good pay. Well, duh. That doesn't necessarily help when the median house price in Sydney, Australia's biggest city, is creeping rapidly towards a million dollars.
- Unexpected medical expenses: You can keep your rent costs below 30% of your income, only eat out twice a week, and skip every Steam sale you see, but an unexpected medical expense can still destroy your finances. Medicare covers the basics, but if your problem is deemed non-urgent, you could be waiting a long time for treatment.
- Snowballing municipal violations: For many people, getting a ticket for something minor like lapsed car registration can kick off a cycle that costs a crippling amount of money. If you're not making a comfortable salary, a traffic ticket that costs a couple of hundred dollars can spiral upwards with late fees, higher insurance costs, or lost work hours.
That's not to say that reducing your spending is pointless. If your rent costs are 40-50% of your take home pay, then every dollar you don't spend at the movies is a dollar you can spend on better food. However, you're not clawing your way to financial independence by cutting food costs alone. It can't hurt, but it's not enough.
Saving Is Important, But It Isn't Enough
More often than not, when someone says "spend less than you earn" (outside of any other context), what they really mean is just "spend less". However, spending is just one of the two numbers that you use to determine your financial "gap". You can only reduce your spending so far. Increasing your income, on the other hand, has virtually no limit. Making more money is a lot harder, of course, especially if you're already in a financially crippling situation. It's also quite often the only solution that works long-term. If you're making $30,000 per year or less, no amount of "spending less" will truly prepare you for the future
None of these are easy. Not by a long shot. However, neither is saving money. If you're willing to spend the time to set up an automated savings system, it should also be worth taking a few extra hours to teach yourself a new skill.
I don't want this to come off as callous or overly simplistic (in fact, that's exactly what I'm trying to argue against!). There are systemic and economic issues that make climbing your way to financial stability difficult or even impossible for some people. However, personal finance is more than just maths. It's about your mindset. Reducing your expenses is just one of the three pillars of improving your financial life. Increasing your income and learning how to invest — not just investing your money, but investing in yourself — can be far more important than cutting down your bills, and they're much harder to learn.
Lifehacker's Loaded column looks at better ways to manage (and stop worrying about) your money.