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It’s Not What You Make, It’s What You Spend. Whaa?

This article was written by in Career and Work, Salaries, Saving. 13 comments.

A little tidbit gurus like to throw around is the first part of the phrase in the title of this entry. The second part is the sound Seth Green uttered as the voice of the character Chris Griffin in the new episode of Family Guy that was on earlier tonight.

“It’s not what you make, it’s what you spend.” Surely those who preach this phrase use an example of two people in the same position earning the same amount, having the same path to the current point in their careers. One spends more money than the other. The one who saves more builds wealth faster. Sure, that’s pretty straightforward.

But just like every other bite-sized nugget of “wisdom,” the credo just doesn’t hold up under real life circumstances. Take two frugal people in the same type of job. One is an event planner (and manager of that department) for a non-profit organization, the other is an event planner (and manager of that department) for a corporation. Let’s say they both have a decently frugal lifestyle and have expenses totalling $20,000 in the particular year we’re evaluating.

Our non-profit manager is making $40,000 during that year. Our corporate manager is bringing home $80,000. With the same conservative expenses, who is coming out on top, by leaps and bounds over time?

Our favorite phrase is often used in conjunction with the goal of becoming a “millionaire.” The fact remains that the individual with the highest net income at the end of the year, regardless of gross income or gross expenses, given the same opportunities for investment, is going to reach the goal first. Therefore, these two categories — income and expense — must be weighted equally. If you still believe that level of income is secondary to level of expense, someone has been trying to sell you something, and they have succeeded.

Updated February 6, 2012 and originally published September 25, 2005.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

avatar 1 Anonymous

I disagree with most of this.

Yes, if two people have different incomes and behave exactly the same way in all other ways, the person with the higher income will be better off.

Also, someone with a higher income can spend a bit more, be a bit looser with his/her finances, etc. and still come out ahead of someone who is a saver at a lower income.

Those are two examples of what COULD happen. However, if you want to be realistic, you have to look at what DOES happen. When you look at the facts, how people actually spend their money today, you’ll find that the expense side is generally a much bigger determinent of net worth. I’ve got several posts about it and won’t list them all here, but there is strong evidence that this happens.

I don’t disagree with your point from a logical standpoint — obviously it makes sense. However, most people don’t handle money logically. So you have to look at what people are actually doing (in real life) and give them suggestions based on that. Often the theoretical just passes them by, they do nothing, and they are no better off.

Finally, the expense side of net worth is much easier to control than the income side. People can make decisions today to cut expenses, change spending habits, etc. that will impact their net worth today and in the future. It’s much harder to increase your income in the short-term. (and often even in the long term)

In the end, I’m not saying that income is not important, but given the dynamics, most people have a better chance of increasing their net worth by focusing on what they spend more than they focus on what they earn.

avatar 2 Anonymous

This reminds me of something my financial planner said. She had us on track for a really high amount of income in retirement and I said, but we’re only spending about a third of that right now. She said that we’re young, and in the future we’ll want to upgrade to luxury cars and fancy vacations. Well, no, I don’t think we will. So hopefully we’ll get to compound (no pun intended) the effect of limiting expenses and growing our income. At least until those pesky kids come along :)

avatar 3 Luke Landes

I agree with you when you say it’s easier to reduce your expenses than increase your income, so advice can be given to limit spending — but there is a limit to the reduction. In any instance where two people have limited their expenses to the same reasonable amount for their location and similar living situation, the individual with the higher income will come out on top. (For these people, income is the determinant of net worth.)

It may be true that people earning more may not want to limit their expenses as much, and could end up with a lower net income (income minus expenses) at the end of the year than the individual making less.

There may be facts that show this happens more often than the situation in which two people with a disparity in income reduce their expenses to the same amount.

(Just about any “fact” can be conceived based on the sample chosen when measuring. Book authors who are trying to sell their books choose their data very carefully when they want to support their point. One such example of bias would be if the measurement was taken by financial planners based on their customers’ situations. You’re automatically rejecting anyone who does not go to a financial planner, for any reason including the fact that financial advice an expense they’ve already eliminated. After describing the data without fully explaining the bias, the authors then provide anecdotal evidence in order to “prove” their point — and to make a good story.)

Even if the statistics are absolutely correct and have considered all possibilities, generalizations based on those statistics lose relevancy the further any individual’s situation deviates from the “average” of the statistic. And often, there is no one who matches the average statistic.

So the idea that expense is a bigger determinant of net worth may be true for some people but not for others, depending on any number of factors. Furthermore, a statistic would have to be clear whether the relationship between expenses and net worth is a correlation or causality, and there would have to be some kind of indication that no other variables are at play here. Often there are no ways to control these extra variables.

For example, the low-income earner is completely out of the picture, because with his income he can barely meet his necessary expenses. He may have no way to reduce his expenses further, as well. You cannot preach “It’s not what you make, it’s what you spend” to him. This indivual, probably several standard deviations away from the mean of any statistic, needs to rely on improving his income, which as we agree, for some people can be very difficult.

You say that people don’t handle money logically and advice should be given based on what other people do.

If you’re giving advice, it’s important to give the best advice, not mediocre compromises such as, “Most people cannot effectively change their income, therefore you should concentrate solely on reducing expenses, because ‘it’s not what you make, it’s what you spend.'”

Well, there’s a lot of rambling for a Monday morning. Certainly I agree that reducing expenses is a big part of increasing net worth. Increasing income is also a big part. They share the burden equally. Some people have a hard time increasing income, some people cannot descrease expenses further. You can cut the data different ways and come up with different conclusions.

avatar 4 Anonymous

I can’t do better than FMF, but I would add that money is more about emotion than math, and emotion means the more they make, the more they spend.

avatar 5 Luke Landes

Lauren — I missed your comment earlier. Your financial planner assumes that you will be “just like everyone else” when “everyone else” is an amalgamation that doesn’t exist on its own. And Anonmyous, sure lots of people spend more as they make more money, but just because other people do it is not a good enough reason to be the basis of financial advice, like Lauren discovered.

I don’t disagree that emotions are involved, but that’s what financial planners should be doing — teaching their customers to disassociate the emotions from the financial and not to be concerned with owning more things as income increases, etc.

When you start using bite-size credos, that’s all people remember. (This is what the author intends… it’s a hook.) Taken out of context, the statement will be misunderstood.

avatar 6 Anonymous

Flexo — I’m not advocating giving bad advice. However, as someone who has counseled hundreds of people on their finances, I know that there’s a big difference between the “intellectually best” option and the “practical best” option.

This was much of the discussion on a post I had the other day. See and read the comments and you’ll get a better perspective of what I’m trying to say and why.

avatar 7 Luke Landes

In that post, I am completely on board with you, FMF. I believe getting out of debt is better than using debt to raise cash for investing, even if you can get a slightly better return on investing than what you’re being charged for the debt. (Though I would allow an exception for people who can responsibly handle 0% balance transfers as long as the cash is put into a liquid savings account like Emigrant Direct.)

What I’m against is the oversimplification inherent in catchphrase-credos, which can often lead to gross misunderstandings. And I’m against people who sell catchphrases as financial advice, using anecdotal (not empirical) evidence or selective sampling to support their point of view.

avatar 8 Anonymous

I have seen people earning 36,000 a year maximizing their Roth IRA. I have seen people earning six figures without a 401k or IRA.

That tells me a lot!

avatar 9 Luke Landes

To me it says you’ve seen some people earning $36,000 who are concerned about their financial future and six people earning six figures who are not as concerned.

Today I saw ten drivers from Massachusetts who were driving like maniacs and ten from New Jersey who were driving safely. By “selective sample logic,” that would mean all or most people from Massachusetts aren’t concerned about their safety or the lives of others on the road while NJ drivers are courteous.

I’m not saying the implied conclusion is false, I’m saying there’s no proof yet.

avatar 10 Luke Landes

Ah, a very well-thought-out comment, MMB, thanks. Even taking socio-economic likelihoods into consideration, at the end of the year, there are still only three possible outcomes with regard to the comparison of value of net worth: A<B, A>B, A=B.

If anyone knows of a fourth outcome, I’d love to learn about it. :>

I don’t know what the probability is of any one of those occurances (other than that the probably of the second occurance is very low). My issue is with those who have made their conclusions from shoddy or biased evidence. My issue further extends to those who reduce the precipitous conclusion to an easily misunderstood catchphrase (when it helps to sell books).

Sort of on the side… t-shirts and jeans don’t cut it at all non-profits. Even some big names (think New York Philharmonic) don’t pay nearly as much in any certain position as a public corporation.

avatar 11 Anonymous

I don’t know why but this post annoys me a little. No, scratch that. I do know why. You are using one very specific example out of a number of possible ones to prove your very subjective viewpoint. For your conclusion to be statistically accurate you have to take all possible perms & combs into account and if not, then at least, please don’t state your conclusions as a fact.

Let’s take the case of the two people, 1 earning 40k and the other earning 80k in your example. Here are some possible scenarios:

– Both spend equal $ amounts

– Both save equal $ amounts

– The 80k guy spends all his income while the 40k guy lives frugally

– The 40k guy spends all his income while the 80k guy lives frugally

– Both spend all their income

– Both spend (or save) proportionate amounts w.r.t their salaries

– The 40k guy spends more $ for $

– The 80k guy spends more $ for $

– The 40k guy spends more % for % and $ for $

– The 40k guy spends more % for % but less $ for $

– The 80k guy spends more % for % and $ for $

I can go on, but the point is it’s not that simple. You want to approach this from a purely hypothetical logical standpoint then yes, chances are that given the exact same expenses of two people with disparate incomes the person with the higher income could, over time, build a greater net worth, barring any unforeseen emergencies in his lifetime. However, even with that statement many caveats apply. For one thing the 80k suit in your example probably needs to buy suits for the executive or manager’s summits he has to attend while the 40k NPO guy can probably get away with wearing jeans and t-shirts. If you really want to paint an accurate picture you have to take the full breadth of socio-economoic expectations of these two personas into account as well as all the probabilities from each scenario into your conclusions.

You probably weren’t going for statistically accurate mathematical projection into the future so much as just giving voice to your opinion. I do agree with you there for the most part but not 100%. If you look at the above scenarios (and that’s just a handful of the actual possibilities) there are 4 cases where both the 40k & 80k guy will end up with the same net worth and 4 in which the 40k can actually build a higher net worth than the 80k one.

avatar 12 Anonymous

I don’t know what the probablity is on each outcome either although I could probably calculate. What I was going for is that you can’t generalize based on one hypothetical example out of many possible events. The outcomes are fixed but the probability of each outcome changes with the # of events you take into consideration.

For the most part I do agree with you. At the end of the year what counts is your net savings, not the gross numbers. And the best way to increase your net savings is to maximize earnings and minimize spending. Anyone who focuses on just one aspect of this equation only gets half the picture.

As for the work attire issue – I don’t know much about NPOs so I was just using a hypothetical example as well. Suits were mandatory at my last job 5 days a week. At Microsoft people walk around in t-shirts, jeans, shorts, flip flops. So now I have a closet full of suits and no flip flops. Generalizations as a rule are bound to fail at some point. :)

avatar 13 Anonymous

Another issue is that sometimes the jobs with higher salaries come with a culture that demands higher spending.

You may need more formal, and thus more expensive clothing, for example. I knew one person who felt she had to attend the “girl’s luncheon” each week in order to stay in the loop. This meant going to an expensive restaurant and paying a percentage of the total bill; ordering frugally didn’t make much difference. And protesting the percentage part of the tradition was looked down upon. It’s a stereotype that you may need to be golfing with the guys or joining an expensive club or whatever, but I think you can see my point.

The friend mentioned above was able to save more money earning only 2/3 as much by taking a state job and moving to a more casual city and thus hanging with a different subculture.

Another issue is that a lot of higher-paying jobs also require more work hours than medium-paying jobs, which leaves less time for doing things like cooking your own food and mowing your own lawn. When your time is so valuable and scarce, it makes sense to hire people to do things you don’t want to do, just to save your sanity and your blood pressure (both of which are expensive to fix).

I do actually like this saying, though, because it’s so inclusive. So much of what I read sounds like it’s aimed only at people with upper-middle-class or higher incomes. For example, one common piece of advice is to max out your contributions to retirement accounts. Well, that would require my entire income. I simply cannot follow that advice, so it’s the kind of advice that can make one feel hopeless. Yet, I do think I will be able to retire comfortably at age 52, even if one of the legs of my three-legged stool gets sawed off in the middle, almost entirely because of how I spend.

It would be better if the saying was “It’s not just what you make, it’s also what you spend.” Then it would be emphasizing appropriately that whichever end you can make the most headway with is a good end to be working on.