Telling people to “spend less” as a way to solve all of their financial problems is common advice. And generally, it is extremely unnecessary.

Frugality doesn’t get you far; there are only a certain number of expenses that you can reduce. Telling someone who is already struggling to get by on a low income to spend even less is unproductive.

I tell my financial planning clients that controlling their cash flow is a critical part of financial success. Wealth is what you can build with what you don’t spend, and keeping your spending low means it’s easier to maintain your lifestyle over time (which translates into more financial flexibility) .

You absolutely must live well below your means, but spending less is not the ultimate Solution. Create wealth is more complicated than that.

Spending less is a first step, but it is not the only one to take to create wealth

In meetings with clients of our financial planning firm, we often discuss the difference between looking rich and being really rich.

Looking rich means that you can have many possessions and material possessions. Maybe you have a newly remodeled house or a newly rented car in the driveway that gets exchanged every two years or so. You could take a lot of good vacations or maintain expensive hobbies.

But being rich is more about your balance sheet and the assets it includes.

Wealth is your savings, your investments, your absence of responsibilities such as debts and your financial means. Perhaps most importantly, wealth is the ability to do what you want, when you want to do it – that is, you are rich when you have flexibility and financial strength at your disposal.

It’s easier to look rich. It doesn’t require you to manage your cash flow wisely. In contrast, building wealth is difficult and will require you to make careful compromises and make tough decisions about where to spend every dollar you earn.

Obviously, there is a “spend less” element to that. The person who spends less has more to save and invest – and the more you save and invest, the easier it is to build assets that give you the freedom and flexibility that are the hallmarks of wealth.

What matters more than cutting your expenses

Nothing can replace managing your cash flow and living below your means. But along the way, most people need to do two other essential things in order to build wealth: increase their income and invest wisely.

My theory on why you mostly hear people talk about “spending less” as the ultimate solution to any financial problem is because it’s so easy to tell people to do it. It’s much easier to say “stop buying lattes” or “gift coupons” than it is to give someone a strategy to make more money or build a successful investment portfolio.

But the reality is that nipping pennies does nothing to increase your earning potential or educate you about investing in such a way that you can earn enough return to meet your goals while avoiding undue risk.

It sounds simple at first glance, but figuring out a wise investment strategy becomes extremely complicated. This requires you to understand what is “enough”, have the discipline to avoid swinging for fences and losing everything, and know how to avoid risks that could derail or even destroy your ability to maintain and grow your assets over time.

A good investment goes far beyond simply determining an asset allocation between stocks and bonds; there’s a reason professional wealth managers exist.

The return on your time and the effort you put into increasing your income can be exponential, as can the returns on your investment over time, especially from spending your energy trying to cut expenses.

There are many strategies you can use to achieve this, including:

  • Negotiate the salary (and maybe even the position) in your current job
  • Looking for a new career path that offers more opportunities
  • Seek out positions that include powerful compensation packages beyond a base salary (like bonus structures or stock compensation)
  • Go into self-employment, where you have more control over your income
  • Start a business (and possibly sell it)

The “how” to increase your income are vast and varied. The trick is to know which option is best for you, your skills and your situation.

Eric Roberge, CFP, is the founder of Beyond your hammock.


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