Save more vs Earn more

Save more vs Earn more

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Recently, there’s been quite a few prominent SG finance bloggers who have weighed in on the subject of categorising whether one belongs to the save more or earn more camp.

As usual the comments reflect the tone of each blog and its readership base. The stock picking/chase higher investment returns kind of blogs will tend to have the view that earn more is always better since there’s only so much in expenses a person can cut. The more thoughtful ones will say save more is step one while earn more is the natural second step to one’s financial goals. While I agree that there’s a limit to cutting down ones expenses, that’s only half the picture because it depends on ones financial goals and current situation.

Let’s compare a few scenarios.

Goal – Build portfolio to 25x annual expenses (4% rule) to achieve Financial Independence (FI). 

In this scenario, it doesn’t matter how much the person earns as long as he/she can achieve a high savings rate (say 40%-50% and higher). Taking two extremes, XX earns $10,000 a year while YY earns $100,000 a year and they both save 50% of their income and invest it in the same combination of stocks and bonds. Let’s assume they’re starting from scratch and have no prior savings. Let’s also assume (and this is an important assumption) that they both are happy with their respective standards of living. XX is happy with a lifestyle funded with $5,000 p.a. and YY is happy with $50,000 p.a.. Who will achieve FI sooner? The answer is that both will achieve FI in about the same time of roughly 16 years based on calculators available online.

If you’re wondering how this works, let’s use another two simplified extremes to illustrate. One who saves 10% of income (call him 10%Saver) and 90%Saver. The inverse is that 10%Saver spends 90% of his income and 90%Saver spends only 10%. Ignoring investment returns and inflation, let’s assume it’s zero. 10%Saver would need 9 years of savings to cover one year of expenses (90% expenses = annual savings of 10% x 9) while 90%Saver would be able to live for 9 years after just one year of saving (90% savings = 10% expenditure x 9 years). The math works regardless of how much each earns.

Takeaway – If you can comfortably increase your savings rate to a reasonable level and still be happy with the lifestyle you can afford, then savings alone will get you to FI.

Goal 2 – Be able to afford XYZ (maybe it’s the 5Cs, or a Ferrari, or simply a lifestyle that can be sustained with $50k per annum)

Let’s use the $50k p.a. goal as an example. Remember XX and YY from earlier who earn $10k and $100k p.a. respectively and both save 50% of their income? So YY will still achieve FI in about 16 years but XX will now find it difficult (if not impossible) to achieve FI. What’s the difference? It’s simply because there’s now a financial goal with a fixed nominal value ($50k p.a.) so XX’s savings of $5k is simply too low a percentage of the desired portfolio target of $50k x 25 =$1,250k. XX has no choice but to (1) increase his savings percentage to a higher level and (2) find ways to increase his income such that the dollar amount saved gets closer to the financial goal.

Actually there might be another choice, XX could choose to be happy with a financial goal of $5k per annum since he’s living on that amount already! (Side note: $5k is just a low example and I’m all for striving for the best that we can and maximising our potential as long as the goal is achievable, fits our overall life plans and we don’t burn ourselves out in the process. I prefer a middle ground between “this is enough” and “I want to keep achieving more regardless of the cost”)


If you’re happy with the lifestyle afforded by the amount you’re spending after saving a significant portion of your income, you don’t necessarily have to increase your income further to achieve FI, although that would certainly help.

If the current level of expenditure you have after savings is much lower than what you plan to spend in your retirement years (i.e. you’re tightening your belt significantly but you won’t be happy with this situation forever), then increasing your income is a must!

So while we all have our natural individual temperaments as to being in the Save More or Earn More camps, we also need to know how that temperament fits in with our financial goals, our current income and our percentage of savings in order to achieve FI.

Author: Mr.C

Mr.C – our resident investment expert and the muscle behind this entire movement for Sipping Coconuts. When his nose is not buried in anything financial, he’s either sailing or cooking or with the kids and always with a beer or a coconut nearby!

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