Many people like to quote the old saying “A penny saved is a penny earned”. Me? I disagree with that quote (you will see why later). There are obviously going to be differing viewpoints on the subject: some people think that earning more money is better than frugality and others say that you don’t need to earn more to get rich. While both camps make decent arguments, and I believe both saving money and earning money are vitally important activities, I find there is a huge distinction between the two. And, if anyone is interested in the ultimate goal of wealth creation, you need to be doing both. Besides, isn’t creating wealth a goal for many of us?
Let’s start by breaking down the quote. “A penny saved is a penny earned” is essentially saying that if you decide not to spend a penny, or if you spend a penny less, the effect is the same as earning one. The reason I disagree with this logic is simple: when you save money you are preserving your wealth, but when you earn money you are adding to what you already have accumulated. This is where the idea of doing both earning more and saving begins…
There are two steps to becoming wealthy–creation and preservation:
When you earn more money, you are creating more wealth for yourself. New sources of cash inflows can be investment real estate, new businesses, dividends on investments, or any other side project that bring in money separate from your ordinary job income. This is where the accumulation occurs. Job income is what pays your living expenses, while the added cash flows are what add wealth.
Saving more of your money doesn’t specifically increase the wealth you had already created. Rather, when you save money, you are only preserving what you have already accumulated. You are not better off for not spending the aforementioned penny because you already owned it in the first place. What you actually did was preserve it’s place in your possession.
Think of it like this:
When you go to the grocery store, or anyplace where you would spend money, your checkbook has a certain balance in it. When you go to pay, you have money taken out via a check, debit card, cash you removed from the ATM, whatever floats your boat in this instance to pay for your purchase. Now, regardless of whether nor not you used a coupon or got some sort of discount, your balance is still going to be less than when you started out, correct? Even if you decided not to make a purchase at all, your balance at best will be the same.
Now, let’s look at earning a side income. Same scenario as before: when you go to collect payment from a renter, or a side project, your checkbook has a certain balance. No matter how much or little you collect you are going to have a higher balance after the transaction. Even if they don’t have a single dime to pay you, at worst your balance will remain the same.
So, taking that into consideration, saving money and earning it is not the same. Saving money aims to minimize the loss of wealth while earning money aims to increase the amount of wealth. But, one really cannot provide you as much benefit without the other. In terms of building wealth:
- Earning money is pointless if you don’t have saving controls in place to make sure it stays in your possession, and
- Saving money is equally pointless if you don’t have anything coming in to save.
Do you find a distinction between saving and increasing earnings? What about in terms of building wealth–is it possible to really be wealthy by just doing one of the two? Do you even care? 😛