All of personal finance can be summed up in less than 10 words:
Spend less than you earn and invest the difference.
Both the “spend less” and the “earn more” are ways of creating a surplus that you can invest. You can pull on either lever as you see fit. In the last post we looked at the advantages of frugality, of voluntarily spending below your means. Today we’ll look at two crucial reasons WHY earning more is such a powerful financial move and then dive into the practicals of HOW to make more money.
Why Generate More Income?
When we looked at frugality, we had six different reasons why it was a good idea. As we make the case for income generation, we only have two. But the the second is probably the most powerful idea we have encountered so far.
Building Income Builds Confidence
Making money is dependent on your ability to provide value to the marketplace. Increasing your earnings is a sign that you are growing in useful skills.
While it’s a mistake to measure your worth by your income, a growing income is a sign of increasing competence and is a good reason to feel confident in yourself.
There’s No Limit to How Much You Can Earn
If you are making and spending $50,000 a year, the biggest surplus you can generate through frugality alone is $50,000. And that’s if you literally reduce your spending to $0 a year. Good luck with that.
This is because there’s a limit to how much you can save through frugality: Namely 100% of your spending.
But how much can you save if your spending stays the same and you grow your income? If you keep spending $50,000 but your income doubles to $100,000, you’ll have created a surplus of $50,000. Is it easy to double your income? No. Is it easier than cutting your spending to zero? Absolutely.
And of course, there’s no reason why your income can’t grow even higher than $100,000. If you’re the kind of person that makes $50,000 a year, growing your income by $10,000 is pretty tough. If you’re the kind of person that makes $100,000 a year, the next $10,000 is much easier to come by.
Diminishing Returns vs Exponential Gains
This is another incredibly important difference between saving more and earning more: Frugality is subject to diminishing returns, income generation can experience exponential gains.
Think about it this way: If you set out to start saving money, you’ll look in the most obvious places and find the easiest areas to cut back on. The problem with this approach is that soon all the low-hanging fruit is gone and each additional dollar becomes more difficult to save than the last one.
Contrast this with earning more. In the beginning, your efforts might not result in any additional income whatsoever. But your efforts are able to stack on each other and as you make progress the flywheel starts to move.
We can illustrate what is looks like to run into diminishing returns when it comes to frugality. Let’s assume that you currently make $50,000 a year and spend all of it, and you are going to focus on cutting costs without raising your income. Here is how your efforts might play out over time:
Here’s how to read this chart:
- The green line is your spending level, which stays constant at $50,000
- The red line is your spending level, which starts at $50,000 but goes down over time
- The brown shaded area is the sum of money you both earned and spent
- The green shaded area is the surplus you generated by spending less than you earn
You can see the problem. You started out strong, but ran out of easy ways to cut back. Frugality has a way of becoming harder over time. You start by cancelling subscriptions you don’t use, but before long find yourself splitting double-ply toilet paper into single-ply by hand.
If you only focus on frugality you’ll have to fight to pry open a tiny sliver of surplus.
Let’s see what happens instead if we ignore cutting costs and focus all our energy on earning more:
This is a much prettier picture. It doesn’t start out as well as the other, but over time the cumulative advantage of income generating wins begin to pile up. There’s a whole lot more green on this chart than there was on the last one.
Again, doubling your income isn’t easy, but with ten years of focused effort as in this example, it’s certainly doable.
Of course, here’s the best of both worlds (and the philosophy of this site): start with frugality than switch your focus to earning more:
Related Post: The Math Behind Making $100,000 a Year
How to Earn More
There are an infinite amount of strategies for earning more money. Some of the ways people are making money now didn’t exist 30 years ago and some of the ways people will be making money 30 years from now haven’t been invented yet.
To simplify things, we’re going to look at a few main categories of income generation and see how you might create a solid strategy for each of them.
The Corporate Ladder
This is the classic rout and there are four viable paths:
- Find a better paying job outside your organization
- Land a promotion inside your organization
- Negotiate a raise in your current position
- Sit back and collect cost of living raises
Getting a Better Job
When it comes to the first two strategies, you need to keep an eye on what opportunities are available and you need to be willing to fail a lot to get what you want.
Remember, it doesn’t matter if you’re only successful in 5% of your interviews. You only need one promotion to make an enormous difference in your financial situation. No one but you will ever know that you went on 20 interviews and only got one job offer.
One unusual strategy that I was successful with is asking people who had the job that I wanted if there was anything I could help them with and if they’s be willing to show me some of what they did. When they got promoted or left the company, I would apply for their vacant position and be able to speak knowledgeably about the job.
This strategy only worked once out of the three times I tried it, but once is enough.
Negotiating a Raise
Instead of looking for a better gig, you can ask to get paid more for your current job.
This works best if you have a plan. Schedule a meeting with your boss and ask frankly what it would take to land a raise. Come prepared with ideas and suggestions for how you can improve your department and/or make your company more profitable.
Be sure to also ask your boss how you can help her out. Remember, she also has a boss that she is trying to impress, and if you can help her do that she’ll be much happier about giving you a raise.
One key with this strategy is to come up with a specific plan that you can execute and to set up a meeting to discuss progress.
The other key is working hard and doing what you said you were going to do.
This isn’t a separate strategy, but we have to list it to make an important point. Most companies offer yearly cost of living raises on a percentage basis. If you’re making $30,000 a year and get a 3% raise, your salary goes up by $900. If you were making $60,000 a year, it would have gone up by $1,800.
The more you make, the bigger your raises and the rich get richer.
The Freelance Hustle
Believe it or not, it’s possible to make money outside a cubicle.
The internet has forever changed the ways that we can find people to work with. If you have a valuable skill and can offer a valuable service, you can find someone willing to give you a gig.
I dabbled in the world of freelance writing by building a portfolio on Medium and applying for jobs on the problogger job board.
Medium is a great site to get started writing, because you can write about whatever you want, get decent views right out of the gate, and even make money by signing up for the partner program. Once I had some a few solid articles that generated some decent stats, I used them to land a well-paying gig writing about personal finance.
I made several hundred dollars off just a few articles.
If you don’t mind hunting for new business, freelancing can be a great way to earn money.
The Entrepreneur’s Empire
Many people confuse freelancing and entrepreneurship, but they aren’t the same. Both are forms of self-employment, but the freelancer has traded having one employer for a variety of clients. As an entrepreneur, you seek to build something bigger than yourself.
The goal of entrepreneurship is to make money while you sleep.
Historically we would think of this as the archetype of the founder: The person who starts a business, raises capital, and scales it to an enormous enterprise.
That’s something that still happens, but here again the internet has opened new options. As amazing as it seems, the internet has allowed for the possibility of The Million-Dollar, One-Person Business. The internet has lowered the cost of entering a global marketplace and allowed for the automation of an extraordinary number of tasks.
You might not become the next million-dollar, one-person business, but you can still create a strategy to use the power of modern technology to get paid while you sleep.
The New Assets
Everyone knows that a reliable route to riches is to own assets like stock and real estate.
But don’t forget about digital assets like websites, YouTube channels, and digital products. It takes a while to build a network of digital assets to the point where it grows its own momentum, but when it does the results are powerful.
Think about it this way: I’m not getting paid for the hours that I put in at my job in 2016. I’m not being paid for the freelance work I’ve already finished. But I am being paid for videos that I uploaded to YouTube in 2016 and posts that I wrote on Medium in 2018.
Getting over the dip is brutally tough, but making money while you sleep is no joke.
Mix and Match: Long Live the Side Hustle
We all know it’s incredibly important to diversify your investments, but your ability to invest is entirely dependent on your income. Maybe we should also be talking about diversifying your income?
The reality is that having more than one stream of income makes you feel good about yourself, provides and extra margin of safety, as well as enormous potential upside.
Your side hustle might not grow into a viable full-time income, but it might, and that potential is worth something.
Personally, I think it’s great that you hear so many people talking about a side hustle. My only hope is that you get past the talking an into the doing. It’s okay if you flounder at first. You just need the humility to figure it out as you go along.
My Biggest Growth Area
When I graduated college in 2009, frugality was my personal finance superpower. I also had a pretty solid understanding of investing, albeit with no money to invest. There was a recession afoot and I had no job and no prospects.
I worked odd jobs for a year until I landed my first “real” job. Landing the job sounds like the triumphant end of the story, but it was really the humbling middle. I showed up for an interview for a manufacturing position in a suit and had to beg them not to pass over me just because I was overqualified.
The economy wasn’t the only thing to blame. I had no idea how to be successful in making money. I’ve grown a lot since then, nearly tripling my annual salary and starting several profitable side ventures.
But there is always room to grow and this is the pillar of personal finance that I really want to focus on for the foreseeable future.
Finding profit in a free market is one of the great joys of living in the 21st century.