One thing that is constantly talked about in the personal finance blogosphere is the question of which is the better way to increase your net worth. Is it cutting your expenses wherever you can, or is it in being creative and creating new income streams?
Certainly there are benefits to both frames of reference, and to sell one or the other short is probably not a wise choice. So let’s break it down and take a look.
Increasing Net Worth
Cutting Expenses
Finding ways to cut your expenses is an old personal finance blogosphere standby. The advice varies quite a bit in scope. You’ll get some more common suggestions like cutting cable TV, finding cheaper cell phone providers, and packing your lunches instead of eating out. On the other side of the spectrum you’ll hear advice that is a bit more extreme. You’ll read posts about re-using plastic bags, making your own laundry detergent, and using less toilet paper.
Admittedly, most of this advice will probably be able to save you money. Some I’m probably more likely to try than others (can you guess which?). At some point, however, I think you have accept that you can only save so much money by cutting expenses. If you really want to get ahead, you’re probably going to have to find a way to increase your income, aren’t you?
Increasing Your Income
Increasing your income is probably the best way to increase your net worth. I think in many cases people focus so much on cutting their expenses that they forget the other side of the equation – making more money. How can you go about creating extra income?
- Ask for a raise
- Get a part time job
- Start a blog
- Freelance using your skills
- Sell things that you no longer need
The opportunities for making extra income are numerous, and you’re only limited by your own creativity. Making extra income is great, but if you don’t cut expenses, are you really ever going to get ahead?
Which Is Better?
The question remains – which is more effective at helping you create a larger net worth – cutting expenses, or creating new income?
I think the key to creating a larger net worth is to find ways to diversify your income, and increase the amount of money that is coming in. After all, you can only cut so many expenses before you run out of things to cut.
On the other hand, I think you also need to find a healthy balance in your spending as well. If you’re spending more than you make, you’ll never get ahead. Just look to celebrities like Michael Jackson or Ed McMahon – who despite making millions, still had problems with money.
Moderation in everything! Find ways to create new income. Find ways to cut unnecessary expenses. Be thankful and create wealth so that you can give, live and prosper!
What do you think? Am I off base in saying that creating new income is the best way to get ahead? Do you think that more emphasis should be placed on cutting expenses? Tell us what your thoughts are in the comments.
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This is a guest post from Pete over at Bible Money Matters. You can check out his site at http://www.biblemoneymatters.com or you can subscribe to his RSS feed here.
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{ 8 comments… read them below or add one }
I agree with you – cutting expenses is great and should be done regardless, but it has a definite floor below which it’s tough to go any further. You need the basics to live on, and it’s always nice to have a little fun, too.
But adding in additional income to the mix has unlimited potential. Your limits are self-imposed and controlled only by the amount of time, effort and resources you’re willing to put into it.
If you want to get ahead – I say diversify your income and find ways to blow it sky-high.
Hi
I agree with the comment above. If your monthly expenses total $1000 then the maximum that you can achieve by cutting expenses is less than $1000 per month (you are not going to be able to cut them all!). Also, some expense cutting does reduce the fun that you have/makes life inconvenient.
On the other hand increasing your income has no absolute limit (although that isn’t the same as saying that it is easy to achieve!).
Ray thanks for the opportunity to post, I had fun writing for a site other than my own for once! Good luck and God bless on the upcoming nuptials!
So that’s two for increasing income…
If you can only choose one, I would choose cutting expenses. I personally find that I have much more control over what I spend than what I bring in. Income depends on things other than the one receiving it.
Great post. I think it is important to apply both methods. One can reduce one’s expenditure only that much, however, if your income is not being increased, through raises, alternative income streams, investments and so forth, one’s net worth will not increase by much. The key factor is to increase one’s income; this is the true way to attain a certain level of wealth in one’s lifetime.
Cutting expenses does help develop the mindset needed for wealth creation, because you now pay more attention to where your money goes. This is key. Once you have the mindset, an increase in net worth is almost automatic. You will do things that are aligned to increasing your net worth.
These are excellent thoughts to be considered.
When looking at the two choices from a cost/benefit perspective it always seems to me that you are better served to focus on cost reduction first.
For every dollar earned there will be taxes and additional expenses incurred not to mention your time and effort invested. The value of every dollar saved should go straight to your bottom line and therefore have a greater impact on the final result.
However, financial management should always be a combination of both.
I just realized this about myself. I have been focusing on cutting expenses but it is like hello!? ….I am never going to payoff my debt with the salary I am making. I am going to focus heavily on this and see what I can do.
Can’t state enough how important the sacrifices that go into wealth creation are.
Curious if anyone has caught this book yet? “The Richest Man in Town” by W Randall Jones. I’ve read half of it so far and let me tell you it is well worth it. Would like to hear what everyone else thought of it?
http://www.richestmanintown.com
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