Wednesday, 1 January 2020

Making Money Vs Saving Money | Which One Is More Important?

Making Money Vs Saving Money

What's more important to achieving financial independence, a good offensive strategy ( in other words finding ways to generate an income) or a good defensive strategy ( in other words finding ways to lower your expenses)? There are certainly some good points on both sides of this debate so today we're going to look to try and find an answer to this often asked a question.

When you're looking to achieve financial independence there are really only a few things you need to consider. You need to consider how you're going to make money, how that money is going to make you more money, and how much you need in order to be financially independent. Essentially you need to figure out a way to generate an income both through your own labor and without the need for your own labor ( since there will eventually come a time where you simply can't keep up the workload) and you also need to figure out your expenses.

Before we answer the title question of the article whether it's more important to have a good offensive or defensive when it comes to your finances let's first look at what goes into each side of the debate.

Let Get Started

On the one hand, you have people who propose that having a strong offensive strategy is more important than a strong defensive strategy when it comes to achieving financial independence. A strong offensive strategy requires you to focus primarily on raising your income and finding ways to generate extra income off of that income. Income earns through your own labor is usually generated through a job or some sort of business. Income not generated through your own labor, commonly known as passive income, can be generated in many ways but usually, it's through some sort of a business wherein you are the owner as opposed to the owner or manager, or some kind of investment.

The biggest pro to this side if debate includes the fact that income, particularly in highly profitable businesses, can be generated in effectively limitless amounts for all intents and purposes. This level of income is made possible through something called the law of affection.

The Law Of Effection

The law of effection states that the more people whose lives you affect in an environment that you control, the more money you will make. Say if you were a really knowledgeable and skilled personal trainer that wanted to play your financial strategy primarily offensively and so you went into business for your in an attempt to raise your income above what you could be making at a gym.

  • You could do very well for yourself as a consultant working with individuals one-on-one or small groups but your income would be very limited in that scenario compared to if you instead wrote and sold books or online courses on how to lose weight, or gain muscle, or put together a good meal plan or all of the above. Why. Because there's only so much time in the day and you only have so much energy at your disposal.

Say you're able to help out 5 people at once in one of your small group sessions and each session lasts about an hour and costs the client $50 to attend. Even if you only slept 4 hours a night, took no time away from work to eat or run errands, and worked for the other 20 hours of the day, you still only be able to help a maximum of 100 a day and thus earn $5,000 which granted is nothing to sneeze at but it's not the same as being able to sell a book at $20 a pop over the internet to a worldwide audience of 7.5 billion people that can be buying from you 24 hours a day, 7 days a week, 365 days a year without taking up any of your time after the initial amount you spend to write the book.

That's not even to mention the fact that you could go back to your group consulting gig after finishing writing your book or just pour that time into making another passive income generating product allowing you to reach and help even more people and continue to raise your income, rinsing and repeating until your income is a level that you are happy with.

Making Money

Having this level of income will not only enable you to live a much finer lifestyle than someone who chose to play primarily defensively, but it also gives you the opportunity to generate massive levels of wealth over time thanks to the miracle of compound interest. Eventually, it may get to the point where you have so much put away that it almost doesn't really matter how much you spend. 

Now obviously that's only ever going to be true to a certain point because you still have to live within your means no matter how much you are making in order to have money at the end of the day but there's a big difference between having means of $40,000 a year and means of $40,000,000 a year. The biggest con or potential con to playing primarily offensively is that there's a lot more risk involved, theoretically.

You see there just aren't many jobs out there that pay good enough money at least when compare to the potential payoff of having your own business. This usually means in order to take full advantage of your offensive potential you're usually going to find yourself starting your own business in one form or another and not all businesses work out the way you wanted them to. Which could be good or bad.

  • Now to someone who has a truly relentless offensive mindset towards their finances is probably not going to be deterred by this at all. Because if one business fails or doesn't go the way they expected they just start another one, learn from the mistakes of the first business, and keep trying until they eventually get it to work, but it is something to consider because there's always going to be speed bumps on the road to success.

However, another thing that I would like to point out here is that there's going to be speed bumps on the defensive path as well. Sure you may not have the failed business or the potential lawsuits from a failing business but you also don't have much control over your job security either when playing defensively. You maybe get fire due to a poor economy or heck just having a co-worker in a position of power that doesn't like you some reason. Office politics are, unfortunately, very real. 

So just because there are risks associated with the offensive approach don't make the mistake assuming that there aren't risk with the defensive approach. The biggest pro to the defensive approach that I've heard mentioned a lot, aside from the perceived lack of risk that I just covered, is that learning to live happily on less gives you way more leeway in achieving financial independence and possibly more happiness, though it's arguable whether this is because of the confidence you gain from learning to live on less or from the large stack of cash in the bank account.......

But coming back to the idea of leeway, it all goes back to the 4% rule which I've covered before.

Read: How Much Should You Spend Annually In Retirement? 4% Rule & Safe Withdrawal

Saving Money

It states that you need roughly 25 times your annual expenses in retirement saved in order to have a reasonable chance of not running out of money after you leave the workforce. What this means is that for every dollar you cut back you save yourself from the need to acquire $25 worth of savings in your retirement funds. Cutting back your expenses also means that you do in fact have that extra dollar to put into your retirement funds, which can help you reach your goal that much faster. 

However, the biggest potential con to this defensive strategy is that you can only cut back so far. Now there are people who cut back way farther than you would think possible, as little as $7,000-$8,000 a year, but as impressive as that may be, there's still a limit to how far you can cut back, and there's probably even a stricter limit on how much we can cut back in a healthy manner without putting ourselves at higher risks for financial repression and spending sprees later in life. 

  • In comparison to the offensive strategy which as I said is for all intents and purposes here pretty much limitless potential. And let's face it none of us wants to live in destitution. I don't think any of us really want to have just barely enough money to survive in retirement, even if it might seem like some days for some of us who really don't like our jobs and just want to get out of it as soon as possible, but in truth, I don't think at the end that's what any of us wants. 

If for no other reason than, if we're honest with ourselves, we would eventually realize that retirement, especially early retirement, is long. For the first time since being a kid, you suddenly have too much time on your hands and if you never have any money to do anything, other than put foods on the table, it can become quite difficult finding ways to enjoyably fill the days. Sure there's s lot of fun things that you can do for free, but we talking about 50 to 60 years if not more that you are going to have to live on that tight of a budget.

There's only so much that you can cut back and if you cut back by too much the quality of life diminishes... Does that mean I think that paying offensively is the superior strategy? Well, not exactly. But neither do I think that paying defensively is necessary the correct strategy. I actually think that we're asking the wrong question. 

  • The question shouldn't be which one is better the question should be how can we pull off both? How can we find a way to cut back on our expenses and stop wasting money while simultaneously generating more? Because in the end, it is the best strategy. They offset each other's weaknesses very well and the same is true for enhancing each other's strengths.

There isn't as much true risk to you and your family if a business or side hustle fails if you've learned how to stop wasting money and you're living on less than you make at your job. And your means that you have to live below are higher than they would be if you just played defensively because you have diversified your revenue streams at least to some extent. In addition to that, since you've learned to live on less by not wasting money, the extra money you're generating is then able to be put into your retirement accounts and help you achieve financial independence that much faster. Or back to your business if you go that route.

  • Because after all, it's not really how much we make that matter, it's not even necessary how much we spend that matters..... it's the difference between the two. it's how much we keep that matters. So, yes, continue to focus on your budgets and other defensive tools, continue to learn how to stop wasting money on things you don't value. Never buy things with money you don't have because you're trying to impress people you don't like.

But also continue to research ways to diversify your revenue streams not only so that you can make more money but also so that you can be protected in the event that life happens..... Because let's face it at some point life happens to all of us.

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