sometimes it is the amount of money you make

April 9th, 2008

Sometimes It Is the Amount of Money You Make

A lot of personal finance books, after repeating the mantra of spend less than you earn, talk about how it isn’t the amount of money you make, it is how you use it. I agree with that, to a point, but there truly is a point where the amount of money you make is actually a factor. If that wasn’t the case, anyone who has started truly paying attention to where their money goes would have fully funded retirement accounts and emergency funds and whatever else we gave value to in life.

That isn’t to say there is a hard and fast number that one must make to be able to get by in our present society. The cost of living varies so much from place to place and region to region that it is impossible to narrow things down to “If you make X and use it wisely and contribute Y to your retirement savings, you will be able to live comfortably and have a long and prosperous retirement.” And there are always people who can stretch our assumptions and do more with so little that our brains can’t even absorb it.

But there’s a limit to frugality. There’s a limit to saving and to investing and that limit is what we earn. We can downgrade our house, or rent where that is more appropriate, we can bike to work and limit food to the healthy essentials and nothing more, have no entertainment budget, and still, we might not be able to meet every arbitrary possible goal for savings and retirement. If we only earn $2000 a month, it is hard to imagine being able to contribute $2200 to retirement every month.

The good news in this is that with effort, creativity, and a little luck, we can earn more. We may just have to let go of the assumptions that we have to fit a specific mold and earn money only through a traditional 9-5 job. There are opportunities to be creative and turn hobbies into income streams, different part time alternatives, and other ways we can bring in a little extra income, if only we open our minds to exploring them. My own income streams consist of nothing that would fit into a “traditional” mold, yet I manage to bring in enough money every month to greatly enhance our debt reduction goals. At some future point, that may allow us to hit retirement contribution limits I never thought possible. For example, the maximum amount we can contribute to retirement theoretically through a 401K and 2 Roth IRAs is about $25,500 a year. If we contributed that solely with my spouse’s income, he’d bring home almost but not quite enough to pay our mortgage payment every month (which is equal to the typical 3 bedroom rental in our area) and nothing else. But with my income, made up of various income streams that allow me to stay home with my young children and avoid the expense of daycare, we may have a shot at at least approaching that contribution limit in the future if we choose.

Boiling down the argument to “it’s not what you make, it’s what you spend” is oversimplifying the issue and not giving due credit to all the middle class families like ours who truly don’t make a whole lot of money every month. But don’t let that stop you – seek ways to make you life truly guided by what you choose to spend and not spend. The amount of income we can earn is certainly not limitless, but it may be more than we previously imagined.

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32 Responses to “Sometimes It Is the Amount of Money You Make”

  1. Right on. A lot of PF books and blogs overlook just what you’re talking about here. You can track spending to the penny all you want, but there’s a limit to what that can do for you. ‘Living below your means’ comprises two things – spending and income.

  2. You make a good point, but what anyone must learn is to live on less than they make. This doesn’t mean that one cannot strive to make more, but if one does not know how to live on what he makes, then it doesn’t matter how much he earns, he will be in the same predicament.

    Learn how to manage what you have, and then figure out how to get more of it.

  3. Amen! A lot of times that I hear people say that I think how it’s way easier to say it making 6 figures than an average middle class family. I get the basic premise that you have to spend less than you earn. I just sometimes want to challenge the people who say that to really only spend $20K/year :)

  4. @ MITBeta – Yes, you need to live on less than you make. But as I said, the idea of “it’s not what you earn, its what you spend” is seriously oversimplifying the issue. That idea is spouted as if its the holy grail of personal finance – but if what you make is limited, you might survive living on what you make, but you won’t get ahead. And retirement will be a dream not a reality.

    I’m not advocating you simply make more money so you can spend more. What I am advocating is the idea that things are usually not as simple as that one phrase.

  5. Good point Paidtwice! It is easy to oversimplify personal finance into a single mantra. Like with many things in life, balance is key. Thanks for reminding us to watch both sides of the spending/earning equation.

  6. Point well made. The PF books and magazine articles are geared for newbies to PF. That’s the easiest starting point.

    I’ve led about 50 families thru an FPU class. I’ve yet to see one single family start the class that really couldn’t cut their spending and life style.

    By the end of the class, I’ve seen numerous families get to the point where they cannot squeeze the “outgo” any further.

    Then its time to focus on the income side. That’s why we have a lesson on careers and extra jobs.

    That’s also the reason why I’m trying to get a 48 Days to the Work you Love seminar up and going as well…

  7. Unfortunately here in the US, I would say it is -usually- more how we spend it rather than how much we make. Yes, there are people out there who are limited by their income. But if you drive to a decent section of town, you will generally see newer homes, two SUVs in the driveway, and a garage full of stuff. Stuff is what is killing us.

  8. As I begin to dig myself out of debt and consider the possibility of investing my ‘extra’ money, I’m thinking more often about the ‘limits’ of my salary. I work in education, and although I’m doing what I enjoy, my salary is only $500 more than what I was earning ten years ago (when adjusted for inflation).

    This makes me wonder how I can increase my income NOW not just to pay the bills, but to invest for my future. The more I work now (I have two jobs, roughly 50-52 horus a week) the less I work later. My friends and family think I’m nuts. But I think of it as choosing to improve my finances—any way I can.

    Thanks for a great, thought-provoking post!

  9. Thank you for this excellent post. I recently had a retirement fund representative tell me that the only way I’ll ever be able to retire at 72 (in 30 years!) was to increase my contribution (from 5% of my pay to 15% of my pay) to the retirement plan. 15%!!! So if I gross $28,000 a year, that means $4200. Factor in taxes and I’m left with roughly $18,000 a year. Rent + car payment + insurance = $10,000 a year. On the remainder — $670 a month — I’d have to pay utility bills, replace worn clothing, buy groceries, pay for car repairs, pay for appliance repairs, and put a decent amount away in a short-term savings account . . . . It just wasn’t going to happen. I’ll never retire.

  10. Excellent points. One of Jean Chatzky’s points in “Make Money Not Excuses” is that to be rich, you have to make a decent living. The others are spending less than you make, making the money grow, etc. (I don’t want to spoil my book report.)

    We don’t make very much right now, so we can’t possibly save $2000/month for retirement. What we can do is find ways and develop our skills to start making more…

  11. @ Mrs Micah – I thought that was an excellent book, I am actually reviewing it rather soon too. :)

  12. Unfortunately, where we live I would have to bring in an extremely good (second) paycheque to make up for what we’d end up paying in taxes. In other words, as long as we can manage on one (relatively low) salary, we get a number of tax benefits that offset some of that low income; as soon as we started adding any taxable income that I might make, we would move into a higher tax bracket and begin losing those benefits. In the same way, if my husband made somewhat more money (but not a lot more), we would face the same problem. It’s a bit of a vicious circle. So for us, it makes more sense to concentrate our efforts on spending less, rather than try to bring in extra cash.

  13. I recently took the FPU class at my local church and was a little dissapointed. I felt that it was more of a wealth management class. No doubt it helped my husband and I get on the same page financially, but it will take us years to reach the 3-6 months of income for an emergency fund. There just isn’t enough money. I truly understand that it is about living frugally for a season, it just feels like with our income, we will never reach the goal of “living like no one else.” Before taking the class I knew there was something wrong with our finances, now I know that it isn’t our spending, it’s our income. Yet I know that there is always hope. Someday it will work for us too. Never give up frugal friends!

  14. Great perspective and one to keep in mind. Getting rich (or finanically free) is a two sided equation. No point saving money, if you ain’t making it.

  15. Sarah, that can truly be frustrating. There are a few easy ways to increase your income by $100 a month including moonlighting, websites, and small part time jobs.

  16. In a nutshell, what really matters is that gap between what you spend and what you earn. There are two ways to make that gap bigger: spend less and earn more.

  17. “…and still, we might not be able to meet every arbitrary possible goal for savings and retirement.”

    I always thought one of the hallmarks of being frugal is deciding what your savings goals are and focusing your resources towards those with the knowledge you can’t have everything (Guess I have an issue with the term arbitrary in the above statement).

    Still, I agree in general that if you’re current income won’t meet the goals you’re setting for yourself and feel are vitally important, increasing that income by either focusing on your current job or finding other income streams is one way to go.

    Another way is to go back and determine if the goals your are setting are realistic and even necessary. For example, is it necessary to completely fund a child’s four year college education at an Ivy League institution? With my kids I decided they could make do with a two year community college degree and two years at a state school. That I felt I could afford to save and, short of finacial catastrophe, ensure I provide them. They want more than that, they have to earn it, borrow it, or otherwise find a way to fund it. I may be able to do more, might end up doing less, but this is the goal.

  18. re: arbitrary – I used that word specifically because I get comments about that. That “I just set my paycheck to get X amount automatically deducted to max out retirement savings and I learned to live without it”. I did the calculations for us and, heh. We wouldn’t have enough left to pay our mortgage. Or rent for a one bedroom apartment in the middle of the midwest. :)

    As for my kids – yes we save for college for them but it is in proportion to our current situation – so, not much. They’ll just have to get into Stanford where they’ll qualify for free tuition ;)

  19. Rob Madrid Says:

    April 18th, 2008 at 5:51 am

    7 million in 7 years has mentioned that several times, you can’t spend less than nothing, you need also to earn more. Generally speaking most people I know can fall in the “spend less” category, mostly by saving up for something and not buying it on credit. Oh for example a new laptop, which I’m typing this message on. I’m shooting to have it paid off this summer. Next one will be bought cash.

    My wife and I are on the other side of the equation, other than a few short years when we first got married we’ve always earned an above average wage, yet we are ALWAYS short of money. Even when we first moved to Germany the tax accountant that did our taxes had to manually figure out our numbers as the charts didn’t go up high enough. Yet we were always broke.

    Or as I always said, the rich maybe no happier than the poor but being poor still sucks!

  20. I’m so glad you posted this. I get so tired of the mass-market PF books and blogs constantly harping on the old “its not what you make its what you keep” (wrong, it is about what you make AND what you keep). I went to a top school and most of my old friends from college went off to high paying careers on Wall Street or went to top law schools and are now working for big firms. We’re in our late 20s and most of these guys are making mid-to-high six figures, one old friend of mine even makes 7-figures (works on Wall St). To them it is unimaginable to not make six-figures and in fact at least well into the six-figures. I went a different route and work in publishing. A great salary in my business is low six-figures, for my friends that was where they started in their respective industries. I make aroun $70k per year which is supposed to be ok by national standards but compared to people I know it is nothing. I found out a while back that one of my best friends had over $1,000,000 saved up and we are the same age (29). I never would have expected him to have saved that much money, he works on Wall St. and makes a lot of money, but nothing out of the ordinary for his business. He lives pretty lavishly so I thought he was spending most of his income, obviously I was wrong. The reason was because it wasn’t just about what he KEPT, it was about what he made. For him to spend $100k more than I do in a year is no big deal but that is a completely different lifestyle. I thought about it and he could spend $100k more than I do and still save hundreds of thousands a year. And this is what has been happening. So a lot of the PF blog crowd would look at him and think he is living beyond his means but because of what he makes he is actually living well below his means. And the sad fact is I learned that this is true of most people I know who make a lot of money and live like they make a lot of money – they’re not spending it all, they’re actually still saving more than I could ever hope to save.


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