Is it More Important to Earn More or Spend Less

If we are ever to build wealth for financial independence then we must first get to the point where we are spending less than we earn.  The remainder after spending are the savings which can then be invested wisely for early retirement (or whatever cause you are looking to build wealth for).  To maximise our savings (hence accrue the amount of wealth we require in the shortest possible time for a set investment risk) we should first take all the earning more and spending less opportunities available to us that take little to no extra time.  On the earning more side this could include asking for a salary increase if you employer is paying you less than the market rate and on the savings side it could be living in a home that is well below what you can afford, not grabbing that Starbucks on the way to work, having the lowest price grocery bill or even taking on a cheaper mobile phone plan even if it means you don’t get the latest smart phone to name but four.

Once you've done that you’re now at the point where to increase your savings rate you need to start expending more time and energy.  On the earnings side this could be working paid overtime, working free overtime if you think it will give opportunity for higher earnings later, looking for a new job that will better recognise your current skills and hence pay you more, undertaking training which will arm you with more skills to enable you to earn more or even developing a side hustle job to bring in a little extra cash.  On the spending reduction side it might include learning how to and then making your own cleaning products, growing some of your own fruit & vegetables or even mending your own clothes.

To achieve a savings rate of 60% of gross earnings I know that personally I have taken all the earn more and spend less no extra time opportunities that I can think of plus I am expending huge amounts of time and energy on earning more.  I am also devoting some extra time to spending less but this area is certainly not maximised as both my living conditions (a small London based rented flat) plus earning more efforts filling the week restrict this somewhat.  The question is does this philosophy generate maximum savings or should more time be spent on spending less?  This site is all about fact based analysis and so let’s run some simple numbers to find out.


Average Joe and Average Jane both earn average gross salaries of £24,509 (an average of the average weekly earnings over the past year multiplied by 52 weeks).  After tax they are both left with £19,484 and without expending any extra energy have found ways to reduce their annual net spend to £15,587.  This means their savings amount is £3,897 for a savings rate of 20% of net earnings per annum.  They both invest in a simple low expense, low tax portfolio except to make the maths easy we’ll assume their asset allocation is constant at 60% UK Equities and 40% UK Gilts and they only make the investment at the end of each year.  Investing this way should result in a real inflation adjusted return, after allowing for ETF expenses, of 5.2% per annum.  This portfolio should also result in no tax being payable in retirement.

To calculate how much wealth they both need to accrue before they can retire we’ll assume they are going to use the 4% rule (which of course isn't a silver bullet) resulting in the need to accrue 25 times their net earnings, £389,681.  This is all shown in the summary below.  Running the numbers results in both Jane and Joe accruing enough wealth to retire in 36 years.

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Both Joe and Jane don’t like the sound of that and decide they are going to increase their saving amount by 50% to £5,845 per annum in an attempt to reduce that timeline.  Jane decides to do it by expending additional time and energy to reduce spend while Joe decides to continue to spend the same but instead increase his earnings.  The result is that Jane reduces her timeline from 36 years to 28 years.  Joe on the other hand, even though he too still saves £5,845 per annum, can only reduce 36 years to 30 years.  This is summarised below.

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Why the difference?  The key is that because Jane has found ways to spend less she now only needs to accrue a retirement pot of £340,971 while Joe still needs to accrue the original £389,681 and so with the same savings amount and investment returns Jane must reach her target earlier.  Secondly Jane’s approach is fully within her hands as she alone can find the savings needed.  Joe on the other hand has to find 12% more earnings which may or may not be possible without external events occurring that are not fully within his control.

As always DYOR.