Mind Your Decisions

Save More or Earn More?

Should you save more or earn more?

This is a frequent money question. It’s also a misguided one.

When I hear this question, I say I want both. I need to earn more so that I can enjoy higher quality products. But for a given income level, I need to save more so that I get more bang for my buck.

The original question is poorly stated. There’s just no way to answer it in general. But there is another way to look at it. If you refine the question slightly, there is a hands-down clear answer.

Money for a Goal

Imagine you need money for a specific purpose, like having $500 for a vacation to the Taste of Chicago in July.

Now, let’s ask the question: is it better to save or earn more to meet that goal?

For me, there are two compelling reasons that saving is the hands-down answer.

Reason 1: Value of Time

You can save without using more time. Cook at home instead of dining out. Rent a DVD instead of going to a theater. Cheaper activities often need more planning, like going to the store, but they have unexpected benefits, like working on your own schedule. When you do things at home, you don’t have to wait for a table, or wait in line to get good seats. My instinct is that cheaper activities average out to be no more time consuming.

Some people are averse to saving and don’t want to give up any purchases. You don’t see people embracing restraint in the land of the free. These people might decide to earn more instead of save more. This seems reasonable as money can also come from part-time jobs, like tutoring kids on the weekend. It seems easy.

But there is no free lunch. You need to give up time to earn this extra money. This could mean entertainment, time with friends, or time with family. As a working professional, I only had about 15 hours of free time per week, so an hour was a substantial amount. I even wrote a whole article about this topic: time is too valuable.

Reason 2: Taxes Favor Savings

The second issue involves taxes. The extra money you earn is subject to income tax. Your take-home pay is less than your gross earnings, depending on your marginal tax level (see more about taxes in this column). For a middle class American, income taxes could eat up about 25% of extra earnings.

Using that figure, you would need to earn about $667 to fund a $500 vacation.

Savings don’t have this issue, as they don’t get taxed again. Savings are already an after-tax amount. Whatever you save is a direct increase to your spending ability. An example: the $10 you would have spent on a movie would be a direct $10 for use on the vacation.

That’s the beauty of savings: you don’t have to save more than necessary. I don’t know about you, but I would rather save the exact amount than work an extra $167.

Some Caveats

As I warned at the start, it’s not always better to save more than earn more. After all, if you don’t earn enough, it’s difficult to save as income goes to immediate necessities. I can think of a few times when earning more is the better candidate.

One candidate is when you feel undervalued at your current job. A new job can give you more time and money.

Another is if you want to fund a retirement account. Money you stash here is often tax-advantaged, so additional earnings might not wilt away in taxes. Also, company 401(k) matches are larger dollar amounts for higher earning workers that participate.

And it’s worth stating the obvious too, that you can do other things besides saving more or earning more. Neither option will help to make better decisions in the first place, like whether you should be taking that $500 vacation.

But when I’m committed to a short-term goal, it’s all about savings. You’ll be more likely to see me lazing on my sofa than spending more hours in the office.