You Can't Budget Your Way to Wealth

You need to earn more money.

One of the most irritating and condescending pieces of popular financial advice is the constant focus on reducing minor expenses as if this is all that’s standing between you and being rich.

It usually goes like this: Some wealthy investor or personal finance expert will lament how Millennials (or Gen Z these days) aren’t saving enough for retirement or a down payment on a home. The reason? They’re buying too many lattes!

Using some extremely tortured math, Suze Orman says spending $100 on coffee every month is like “peeing $1 million down the drain.”

Sometimes the culprit is avocado toast, but the message is the same: Cut back on small luxuries and you’ll be rich (this popular myth can be traced back almost 25 years to personal finance author David Bach).

That’s not to say it’s never a good idea to reduce your spending. There are certainly some benefits, although with them come limitations. Reducing your spending can be an important tool for freeing up cash flow that can go toward debt payments and savings goals (like a home or retirement).

There are obvious areas that are ripe for cutting. You can reduce insurance costs by shopping around, bundling or increasing your deductible. You can reduce food costs by cooking more at home. You can reduce transportation costs by dropping a car, replacing it less often or simply using it less.

There is an opportunity cost to every dollar you spend that could otherwise be saved or invested. If you can take reasonable steps to shift money from one bucket to the other, that can have a positive financial impact.

But unless you have a wildly out-of-control spending problem, cutting spending can only get you so far. That’s because you can only cut so much before your quality of life starts to suffer. There’s a floor to how much you can reasonably spend on rent or food.

The constant harping on spending habits and what you need to cut also plays into the money shame a lot of us suffer from. No one should ever feel ashamed for spending in a way that conforms to their values.

Sure, overspending can take a toll on your finances. Cutting back can be the answer to this problem. But at some point, you’ll need to pull another lever. Ultimately, what really matters is earning more income.

Why Earning Should Be Your Focus

Simply put, there’s a pretty limited bottom to how much you can cut but a theoretically infinite ceiling to how much you earn. How much you earn in reality depends on your industry, your skills and your education level. But this is a far more controllable factor than how much you spend.

To illustrate why earning is so much more powerful than cutting your spending, let’s go back to Suze Orman’s example. If you’re spending $100 a month on coffee (never mind how common this really is), that’s $1,200 a year. Making your own coffee might cut that amount in half to $600 a year. On the other hand, a small $1-an-hour raise at a full-time job would earn you more than an additional $2,000 a year. A $5-an-hour increase would earn you more than $10,000.

If you invested that $600, over 40 years earning an average 7% rate of return you would grow your savings to about $120,000. That does sound like a lot of money, but it’s hardly enough to rescue your dream of retiring one day. Making enough to max out a Roth IRA at $500 a month — equivalent to asking for a $3 an hour raise — however, would leave you with $1.3 million.

This should put your spending habits in perspective. Of course, if you aren’t getting that much enjoyment out of spending $100 a month on coffee, it makes no sense to continue. Just realize that you’ll get much further by increasing your earnings.

Don’t Believe the Latte Myth

Sensationalistic financial personalities want you to believe becoming wealthy requires deprivation. This portrays the endeavor as both simple and miserable at the same time. The reality is that you’d be better off increasing your income and putting away your feelings of shame about your spending.

But there are deeper systemic issues that make saving for a home or retirement harder today. Financial advice won’t fix this. We need to make it easier to build housing — and different varieties — and workers need fair wages that leave them with enough at the end of the month to save for their futures.

Small luxuries aside, big items can add up. Car payments can be hundreds of dollars a month, and if running your vehicle into the ground or only owning one car is an option, that’s a significant amount of money you could be saving. If you love traveling, vacations can add up, and it may be appropriate to ask yourself if you could spend a little less for just as much enjoyment.

Still, don’t be fooled that you’ll become wealthy by trimming around the edges. This message may make a compelling headline, but the real money is made when you simply make more money.