For the first 8 years of my working life, I was solely focused on making more money. And this came at the cost of thousands of dollars wasted. Many of us are taught personal finance either in the home or in school, but knowledge is not even half the battle. And many times we don’t realize that if we don’t first put together a good defense, it doesn’t matter how many points we put on the board. It took me 8 years to discover that a dollar saved is so much greater than a dollar earned. And that’s what this post is all about. Heck, that’s kind of what my entire blog is about.
Why a Dollar Saved Is Greater Than a Dollar Earned
What I’m really trying to say here is, there is more power in controlling your spending than there is in bringing in more income.
We’ve all heard the stories of lottery winners right? They win enormous sums of money and never become wealthy from it. Every single lottery winner loses it all after a couple years.
Precious treasure and oil are in a wise man’s dwelling, but a foolish man devours it.Proverbs 21:20
Judging by the verse above, knowledge that saving money is wise and spending is foolish has been around for a long time.
Consider this for a moment. Say you’re normal spending is $4,500 a month and your income is $5,000 a month.
Option A – Make $100 more a month
Most of us would probably think that if we could only bring in more money, then we surely could be saving that lofty 10%. But look at most of our behavior! That money always finds a way to escape our wallet. But fine, say for example’s sake we decide we won’t spend this money. Well, guess what, we won’t see this entire $100 hit our savings account because.. Yep, you guessed it. Tax. If you’re single making $77,000 gross income then you’re paying 22% tax rate and bringing home about $5,000 a month. Say increasing your income doesn’t bump you up into a different tax bracket, you’re still only seeing $78 of that extra $100 made.
Option B – Save $100 more a month
I promise you, this is where the magic is. Finding a way to slightly adjust our spending or lifestyle to free up more money for savings or investments is the trick. Why? Because that entire $100 goes into our savings without getting taxed. Making more money is awesome, but without good spending control, it’s pointless. This is why a dollar saved is greater than a dollar earned. More money is not the answer to why we don’t save enough. It’s typically frivolous spending and living above our means. Which must be more prevalent now with social media than it has ever been.
The Best Defense Is a Good Offense
Making personal finance seem like a football game was one of the best things I ever did for really starting to understand my finances. Many of us have heard this expression. “The best defense is a good offense.” But I sure never gave it much thought. The truth is, in order to save lots of money, we do need to continue to work to bring in more income. Whether it’s selling crap we don’t use or need anymore. Downsizing our living or our cars. It’s amazing to get a pay raise or another job. Making more money is a critical part of reaching financial independence because the truth is we can’t get our expenses down to $0.
But the mistake most of us make is associating financial freedom solely with this ever illusive explosive income that many of us never achieve. “Oh, when we start making more money we can start saving for our future.” “Maybe if I get a raise we can open up that investment account.” I’ve heard them. You’ve heard them. I’ve said them, and you probably have too.
A dollar saved is greater than a dollar earned, but that doesn’t mean a dollar earned is worthless. There’s an important distinction right there.
But Defense Wins Championships
In keeping with the sports analogy, the truth is, defense wins championships.
- The offense sometimes has bad games.
- Players get hurt.
- The weather sucks and it’s hard to throw the football.
- The other team has just as good an offense as we do.
There are many reasons why this truism is… true. Defense is the rock of a team. It’s the safety net. Without a defense, the money always finds a way to escape our clutches. What’s our first instinct when we get a raise? Go celebrate with a nice dinner! Maybe now we can finally get that new UPPAbaby. Let’s plan a celebratory weekend in Vegas!
Without a great defense, all we can do is hope we were the last team to score when the buzzer sounds. And that’s because without a good defense, the other team is scoring just as often as we are. And for our sake, the other team scoring is our money finding a way out of our pockets and into expensive food, new cars and clothes, you name it. So we might end up saving during a month, but that’s just because we ran out of time to spend the entire amount of our last paycheck. It’s not because we made a plan for our spending and stuck to it. (A good defense.)
Is a Dollar Saved Really Greater Than a Dollar Earned?
Initially, our focus must be on getting control of our finances. (Creating a great defense.) A great defense protects us during layoffs. It helps when our offense is dropping the ball or a key player is out for the season. Once we set up a great defense for controlling our spending, our income is just icing on the cake. It’s gravy baby! If we try to win solely with offense (more income) we will almost always lose because that money finds a home. And it’s never in our investment accounts. It’s typically in a new car, or house, or dinner out, or fancy gym membership.
A dollar saved is greater than a dollar earned literally because we’ve already been taxed on the dollar saved. The dollar earned must be paid to Uncle Sam whereas the dollar saved we have complete say over.
For the first 8 years of my career, I was only playing offense thinking it would win me games. Sure, there were times in my life where I was winning. But the truth is, when I did win, it was only by luck and only by a little. Had I had a great defense in place, the good times would have been great and the bad times would have been just fine. Defense is the name of the game. Once that’s shored up, we can go put points on the board knowing all that extra money is gravy baby. Going straight into exploding our net worth.
A final analogy to consider: Focusing on income solely is putting the cart before the horse. The horse (budgeting/saving/defense) must come before the cart (income/offense). Doing it the other way around never works. The cart must come before the horse. Defense must be shored up before the offense can go do it’s thing.