Income Is Not the Problem

… and more if it won’t fix anything.

When people think of more financial freedom they usually default to thinking more money. If I could just make a bit more then my problems would be solved. But unless we are talking a lot more (and even then…), more money probably won’t fix your problems.

The reason is lifestyle creep.

If you earn more, you’ll find a way to spend that money just as fast (speaking from experience here). It amazing how easy it is to get used to a lifestyle “upgrade”. And with “upgrade” I mean more expensive - not better.

If you are reading this, you are lucky. You live in a world of abundance. Much of the world is still too busy surviving to read a guide like this. But we no longer worry about our survival. We have so easy access to calories that our problem is getting too many. Our lives so comfortable that our bodies are becoming weak.

We don’t need more.

And even if you still think you do, where does it end? (Hint: it never ends)

Saving

There are only two ways you can save more money:

Increase your income
Reduce your spending

Increasing your income is the sexy option. It’s so easy to dream about more money as we think it means we don’t have to make the hard choices of missing out on things (we still do).

I’ve been down this path several times before. Tried to create side-hustles, build a product, start a business. But that stuff is hard.

Here is Paul Graham explaining the payoff of joining a startup:

So in practice the deal is not that you’re 30 times as productive and get paid 30 times as much. It is that you’re 30 times as productive, and get paid between zero and a thousand times as much. If the mean is 30x, the median is probably zero.

The median is probably zero.

Sounds pretty risky to me. Evan Armstrong agrees: “In the long-term, risk-adjusted view, taking a job at a startup is a bad financial choice.”

But what about starting a solo venture? Just you and your laptop? That’s easier than a startup, right?

Not sure exactly why it would be much easier. I have looked into the numbers a bit myself. And based on the top 1000 indie hackers with verified revenue, they agree with Graham - the median is close to zero:

The average monthly revenue for top verified indie hackers is $5089. The median is $30. That’s a big gap, suggesting (together with the graphs) that indie hacking (like startups) is an exponential endeavor.

Another way to increase your income is by getting a promotion, finding a new job, or simply getting a raise. These options have a smaller upside - but also less risk. Maybe getting a higher paying job makes sense in your situation. Or maybe putting in the extra effort for a promotion is worth the time and energy.

But unless you get your spending in order, no amount of extra income will help.

Why reducing your expenses counts twice

If you want to build up financial freedom, reducing your spending is more powerful than increasing your income.

Permanently reducing your expenses by $100 is more effective than increasing your income by $100. The reason is fairly straightforward:

Both increasing income and reducing expenses increase your savings per month
Reducing your expenses also permanently reduces how much you need

When you need less, you’ll build up more freedom per month. (You may even find that you already have more freedom than you though!)

We can also show this with an example. Remember, the savings rate is what matters:

Savings / income * 100 = savings rate

Say your income is 5000 and you save 1000. Your base savings rate is 20%:

1000 / 5000 * 100 = 20%

Now let us increase our income by 500 (all which we save):

1500 / 5500 * 100 = 27.2727272727%

Or decrease our spending by 500 (increase our savings by 500):

1500 / 5000 * 100 = 30%

Decreasing our spending by 500 increases our savings rate to 30% while increasing our income by 500 only puts our savings rate at 27.3%

Reduce spending or increase income?

All else being equal, reducing your monthly expenses by $100 will give you more financial freedom than increasing your income by $100 will.

Whether increasing income or reducing expenses is easier for you depends on your situation. Both are helpful.

The big trap to avoid is lifestyle creep that usually follows increased income.

I suggest you take a hard look at your expenses before you chase any additional income. In my experience, most people have lived with lifestyle creep for so long than a lot of excess can be cut straight away. (And then I also suggest you stay vigilant - lifestyle creep is not a one time thing. Even if you know about the dangers it will find a way into your life again.)

The Math Less