As someone with an interest and focus on achieving financial independence (FI), I’ve observed a divide between personal finance writers with opposing views that either increasing income or decreasing expenses is the expedient path to that end.
I’ve witnessed examples of folks attempting to discredit high income earners that point to decreasing spending as the key to reaching FI. In other cases I’ve seen those with low-to-median incomes that point to increasing income as the key being openly questioned.
In either case, a common argument made is that someone is minimizing the importance of the factor that they’ve already “figured out” when they focus their attention and recommendations elsewhere. For example, a high income blogger whose message is to minimize spending to rapidly achieve financial security is minimizing the importance of a high income when they focus their attention and writing on decreasing spending.
Searching for Common Ground
Given that everyone’s situation and circumstances are unique, it’s my expectation that either a focus primarily on increasing income or reducing expenses will likely make the most sense and resonate with people on an individual level. I’d simply point out that it doesn’t make the other any less valid, regardless of someone’s financial standing. I’d also argue that, regardless of an individual’s focus on one, it’s disingenuous to say that as a general concept either is more important than the other.
Perhaps due to natural tendencies or a focused attention to it, you may find yourself on the favorable side of either the income or spending spectrum. In that case, there’s an argument to be made that your focus should shift more to that which you haven’t optimized.
For example, if you’re a new physician or dentist who has a salary that puts you in the top 5% of all earners in the country, I’d argue it likely makes more sense for you to figure out a way to decrease your expenses (e.g. student loans) to make most efficient use of that high income rather than focusing on how to earn more. In this example, it’s hard to argue someone would have anything but a spending problem if they can’t make substantive financial progress at that income level.
Both Matter
Now, rather than focus on specific examples and simplifying the argument down to whether it’s income or spending that matter most, I’d ask you to consider the obvious: both matter. With that said, I’ll reiterate it’s likely that in a majority of cases it will make sense for someone to focus primarily on one or the other. If you don’t have an income problem, your ability to save is likely hindered by your spending that you’ve allowed to inflate to the point of matching or exceeding your high income. There’s fat there to trim.
On the other hand, if you’re on the other end of the spectrum and close to 0% of your income is on discretionary spending, you would be better served to try and increase your income.
It’s my observation that writers highlight what’s most relevant to them to most improve their situation or that of their target audience rather than anyone and everyone. So, I can understand that the message of a high income blogger (such as myself) writing a post about how decreasing expenses as the fastest means to reach FI may be off-putting to someone else who lacks the income that allows for much in the way of discretionary spending.
I can only emphasize the importance of finding someone who has a message that resonates with you, because there will surely be plenty that don’t. That’s not to say their message can’t be meaningful and impactful to someone. It could just be that someone is someone else.
Breaking Down Income vs. Spending
What about someone that doesn’t have particularly high (or low) income or expenses? Where best for this person to focus? Even if you do only have one of these variables more-or-less optimized, let’s consider it as a math problem just the same.
First let’s work under the assumption that the amount of money one needs to reach FI is proportional to his or her annual spending. That is to say that the amount of money you need in retirement is related to how much you plan to spend in retirement. For the sake of simplicity, let’s consider the 4% Rule (though I have serious reservations about the underlying assumptions of it) for this.
This rule of thumb suggests that a properly diversified portfolio can sustain a 4% withdrawal and has high confidence to last throughout a 30 year retirement based on historical returns. What that means is that if one can attain 25x their annual spending, they have met the 4% rule of thumb and can consider themselves financially independent.
With that in mind, one can assume that the amount of time needed to obtain a portfolio that is 25 times their annual expenses is dependent on their savings rate. Put differently, the gap between income and expenses will determine the rate (time) in which one can reach FI. Getting back to the 4% rule, and ignoring portfolio returns for the sake of simplicity, the equation would look something like this:
Solving for time, we see that the amount of time needed to reach 25x our expenses is dependent on the variables of annual income and annual expenses.
Now, in this example we are ignoring the original portfolio balance, which could already be substantial (or possibly even negative if one is in debt), as well as market returns. However, in the end these factors really only impact the remaining amount that needs to be saved. So, regardless of the starting point and assumed rate of return, the amount of time needed to reach financial independence is still proportional to a ratio of annual expenses relative to the amount one can save in a given year:
Qualitative Look
With this understanding, we can take a qualitative look at how changing these two variables (annual expenses and annual income) affect the time to reach FI. Figure 1 below shows a look at the effect of increasing income on the time needed to reach FI working at three different fixed annual expense levels.
Figure 1: A qualitative look at the time needed to reach financial independence vs. income. The three lines show the effect of three different levels of fixed expenses.
Intuitively, as income increases, the gap between one’s income and expenses grows, and this results in a decrease in the amount of time needed to reach FI.
In Figure 2, we take a look at the case of three different fixed income levels to see the effect of increasing expenses on the time to reach FI.
Figure 2: A qualitative look at the time needed to reach financial impendence with increasing expenses for three different fixed income levels.
As you can see, as the gap between income and expenses decreases, the time to reach FI rapidly increases. As income levels increase, the effect of a given expense level is less impactful on the time to reach FI.
Understanding Every Situation is Unique
Now it’s my hope that this relationship between income and expenses as it relates to time to reach financial independence isn’t surprising. With this understanding, it’s clearly beneficial to consider both the effects of spending and income on one’s pursuit of FI. Having said that, I want to acknowledge some obvious limitations.
If you want to get ahead financially, you have to spend less than you earn.
However, in order to spend less than you earn, you must first earn a level of income that exceeds at least your basic needs. While I would argue that the concept of frugality can apply to anyone regardless of income level, that doesn’t hold the same meaning to everyone. It’s certainly not the same thing to be frugal by choice vs. by necessity.
The pursuit of financial independence is clearly much easier for those with a high income. It’s far easier to decrease your spending rate when your starting point for income exceeds most of those around you. Therefore, I don’t think it’s a surprise that personal finance writers tend to skew toward the side of higher income.
I also think that this also tends to be the reason why the conversation tends to skew toward “decrease spending” vs. “increase income.” I can appreciate that those struggling to increase their income take issue with this. However, I’d ask whether or not it’s possible that this is simply a matter of writers highlighting and focusing on what’s most relevant to them and their target audience.
At the same time, I wonder why we don’t also give low-to-median income earners the benefit of the doubt when they argue that rather than focusing on decreasing spending, it’s added income that would most help themselves and those struggling around them.
In my view there’s no reason only one has to be right. And if the target audience for a given message isn’t you, that doesn’t make that message wrong.
Summary
As previously stated, I think it’s disingenuous to argue that the pursuit of FI can be simplified to an income or spending issue, even if a given person’s primary focus is on one or the other. If someone with a high income has a message and focus on decreasing spending, it doesn’t mean they are discounting the huge benefit their high income allows. It could just be that this is where it is easiest for them to have the most impact on minimizing the time needed to reach FI.
At the same time, with a relatively low income, it can be difficult-to-impossible to save your way to financial independence if there isn’t a sufficient gap between take home pay and expenses. For some, the most practical way to increase this gap is to focus on increased income.
Regardless of the individual circumstances, it takes considerable effort and dedication to pursue financial independence. It continues to fascinate me to read about those that are on this journey.
While I expect well-meaning discussions that at times turn to arguments will continue, here’s hoping we can appreciate and acknowledge the triumphs and struggles of those around us and continue to learn and grow together.
Good balanced view with nice charts.
With the docs I’ve talked to in an informal setting, a variable focused on is often “time.” Rather than focus on cutting expenses or increasing income, they feel they can “out-work” the issue by retiring at a later date. Thus, we have an exploding number of MDs and DDSs who have to work into their seventies.
THIS! You put into words why I’ve felt like I couldn’t ever start a finance blog—-because my situation is one of “high income therefore reduce your spending” always felt wrong to those who don’t have the blessing of being able to reduce their spending. Basically, i feared not being able to serve “both camps.” You helped me realize its ok to be one or the other, just have to be aware its a case of “not wrong…just different”. Most of my social circle is in a place to “reduce spending” as they are high earners too. I’m bookmarking this post so if I ever get brave enough to write about finances, I can remember its ok to be in one camp as long as you acknowledge and are sensitive to the other camps challenges as well. Well written!!!
This post was sparked based on a lot of discussions I’d seen among personal finance writers where it seemed a bit of perspective and understanding was missing. I’m glad you found it helpful, and thanks for the kind words!
If and when you decide to start writing about finances, please let me know. I’m always on the lookout for reading new and fresh perspectives.