Where should you focus your energy ? Income or expenses ?

It's Simple

In the world of personal finance, there are really just two things you can do to improve your situation:

- increase your income
- reduce your expenses

Should you put your time and energy into one, both? Which are you focused on?

I'm a firm believer that you should be working on both if you want to see big improvements. That's not new information, but I think it's worth it to explain why.

One or the Other Doesn't Work

We've all seen stories of lottery winners who've blown through their money in a matter of months. And we've no doubt known six-figure earners who are just a paycheck away from broke.

Having a big income isn't the answer. It helps, but it's not a 100% solution to true financial freedom.

"A fool and his money are soon parted."

Likewise, there are limitations as to how much expense reduction can help you. In fact, of the two, only expense reduction has an inherent limit. You can only reduce your expenses to a certain level.

If you normally spend $25,000 a month, the most you can save by reducing expenses is $25,000 per month. You can't spend less than $0. That's your limit.

This is not a knock against frugality. I think spending your money wisely and efficiently is a virtue, only mastered by a few. But if that's the only area that you focus on, then you are really limiting yourself.

Even if you have a decent income, your ability to build wealth is limited, and it will likely take you your entire career to reach financial freedom.

The Benefits of Focusing on Income

Unlike with expenses, you aren't inherently limited when it comes to increasing your income. It may not happen quickly, but you can see unlimited increases to your income.

If you don't have a career, get one by increasing your education. If you do, ask for a raise or change jobs to get one. Some would argue that career earnings still have you on the "slow lane" to financial freedom. A faster way to get there is available to those who are willing to risk time and energy on a business idea or investing. There is no denying the unlimited income potential that comes from the holy grails of wealth creation: the small business and Investments. Not that everyone who invests or starts a small business is successful.

But I would argue that small business owners and investors have the most lucrative path to financial success. Investment opportunities and entrepreneurial endeavors that have large demand (and can scale) have unlimited earning power.

 Focus on Expenses First. 

One benefit of working on your expenses: you can do it quickly. You can literally cut expenses overnight. Cancelling services, down-sizing vehicles, and other cost-cutting measures don't take a lot of time or energy.

One day you could be spending like a drunken rich man, the next you could be living well within your means. The same can't be said for the income side of things.

Therefore, if you're just getting started with improving your financial situation, you should probably take a look at reducing your expenses first. It's the low-hanging fruit.

True frugality and spending wisely will take some time to master, but you can get started there as well.

Once you get your expenses reduced, start focusing on ways to increase your income. I would argue that once you reduce your expenses to a decent level, your time is better spent figuring out how to bring in more income vs discovering more more ways to ratchet down expenses. But thats just my side of the story. 

What do you think?