How do I get rich/wealthy? Ask this question and you are guaranteed to be bombarded with a gazillion pages of information! After you cut out all of the flab, garnish, gloss and wrapping, you’ll realize that it boils down to one simple principle –
And that is, to spend less than you earn. Yep, that is it! Can it be that simple? But hey, that isn’t a simple thing to practice consistently.
If you have been reading PF blogs you will recall that this simple principle has been flogged to death more times than you could count. Yet, this timeless principle is the basis of your financial independence journey. Can there be another way then? Well, there is another school of thought that would say –
Earn more than you spend.
Are these two principles the same? Well their intent it to produce a similar outcome, however, their approach varies.
The spend less than you earn brigade exhort you to live within your means and tighten your belts to “defend” every rupee, dime, nickel, whatever from leaving you! Every unit of currency is a determinant of whether you would turn out richer or poorer in the longer term. The focus here is to hold on to every unit of money and figure out creative ways to save (and invest that saving). The max you can save is limited by your earning; for example, if you earning 1000 rupees/dollars/<replace with your favorite currency> per week, the absolute maximum you can expect to save is the 1000 units of whatever currency you are raking in.
The earn more than you spend folks say that you should not deprive yourself of whatever it is you are spending on now but instead figure out ways to increase your earning so that there is a difference which may be saved for your retirement/financial independence. The greater your earning (assuming your spending remains at constant levels), the faster you get out of the “rat race”. The upper limit to saving in this paradigm is virtually unlimited (alright limited by your own ability to earn!) Of course a gating factor would be your ability to retain your spending at existing levels. Most often, the problem with increased earning is the corresponding increase in spending a.k.a. life style inflation that leads to increased consumption with little left behind for saving and thereby investing.
Which of these models do you think is best? It is ultimately your choice. However, a combination of both approaches yields the maximum results. Play great “defense” – via pursuing every opportunity to reduce spending while also playing great “offense” – via pursuing every opportunity to maximize your earnings. I must admit here that not everyone is/can be good at playing “great” defense and offense. Many are below average or poor in both areas. Some reach an average level in either area. However, if there’s one skill that you want to develop right now, shore up your defenses (assuming you have a fairly average offense going).
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