If you make a million dollars and spend a million and one, you’re just as broke as the minimum-wage employee who can’t make ends meet. Ponder that for a moment as we prepare to discuss the topic of earnings vs. savings. They are not mutually exclusive. To achieve financial stability, both will be necessary. This is a conversation about how they should be weighted.
Focus on debt first. It’s difficult to get any traction in the wealth-building process when you’re paying off high-interest credit card debt. Create a budget and then choose a payoff strategy. If you want to see steady progress early in the plan, use the debt snowball method. If you want to focus on eliminating high-interest balances, try the debt avalanche approach.
Rich people focus on savings
According to Steve Siebold, author of How Rich People Think, rich people focus on earning. He goes on to say that “average” people focus on saving. It’s a good point, though a bit narrow-minded. We’d like to modify “rich people” to “individuals intent on financial improvement.” It’s more about motivation than actual net worth.
As for “average” people, what exactly does that mean? With the amount of diversity in the world, it’s almost impossible to determine what “average” is. The term is like the word “normal,” which is just a cycle on the washing machine. For simplicity, let’s separate our two groups into “motivated” and “comfortable.”
Motivated people are driven to make money, so of course earning is prioritized over saving. Comfortable people, those who are content with their lot in life, tend to be more savings-minded. Building savings and retirement funds is necessary to maintain their status quo. Motivated people are apt to take risks, trading long-term security for short-term gains.
Finding the proper balance between earnings and savings
To break it down even further, younger people tend to be more motivated while folks closer to retirement lean closer to the “comfortable” zone. If you use this hypothesis to create a balance between earnings and savings, it suggests that you should try to earn more early in life so you can save more as you start to wind down your career. Unfortunately, this is common.
Young people often don’t prioritize savings. They’ll make minimum contributions to retirement savings and maybe have an emergency fund set aside for life’s little curve balls. Other than that, they mainly focus on making more money. That’s good, but it’s not a recipe for long-term financial stability. Putting money aside in your 20s could lead to early retirement.
Which of these is more important? It’s not necessary to make a choice. When you earn more, save more. The best way to go about doing this is to create a plan where a certain percentage of your earnings goes directly into savings. The annual IRS maximum contribution amount for a 401(k) is $19,500. That’s a good place to start. Set it as your first goal.
On the other hand, insufficient earnings can eliminate the possibility of savings. Go back to the scenario we described earlier. If you’re spending more than you’re earning, you need to make some changes. Cut your expenses. Look for a new job. Increase your earnings and start saving so you won’t be stuck in the same position again.
Kevin is a former fintech coach and financial services professional. When not on the golf course, he can be found traveling with his wife or spending time with their nine wonderful grandchildren and two cats.