Monday, August 29, 2011

Cut your spending, then boost your income

Managing your spending, the money that goes out of your accounts each month, is a crucial first step in controlling your financial situation.  If you're in debt or not meeting your financial goals you can either cut your spending, boost your income or do both to find the extra money you need to improve.  I believe that cutting spending is the most important step you can take to improve your financial situation because if you cannot control your spending it doesn't matter how much your investments return, how high your income goes, or if you have the best insurance, you will still be living basically paycheck to paycheck each month or going into debt.  Realistically, there is no level of income you can achieve that an out of control desire to buy cannot spend.

Your net worth and money management is definitely a two-way street though.  There's the money you spend going out and the money you earn or passive income streams coming in.  If the outflow, spending, is bigger you drain your savings or go into debt.  If the inflow is bigger you have money to save and invest.  So really, to maximize your financial situation you want to minimize spending and maximize income.

So once your spending is under control, your expenses are stable and sustainable and you're not adding to your debt, then you can start looking at increasing your income.  Extra income can give you a huge boost in flexibility in your budget and your savings and the sky's the limit on how much extra you can earn.  But, the comparison between increased income and cut expenses isn't dollar for dollar because taxes take a huge bite out of the money coming in.  So a dollar in cut expenses might actually have the same effect on your budget as $1.50 in extra income if you pay about 33% in taxes.

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  1. I do think cutting your spending is a good step, but I'd say that before people can do that, they first have to know WHAT and how much they're really spending.

  2. can't agree more, saving money can only improve your finance up to a limit, then it's all your caliber to earn more

  3. Cutting your spending is the first step, no question about it. People should also know what is fat and what is bone before doing that. There is no point in cutting essential and feeling miserable. If we have a clear idea of our goals and vision it becomes much easier to decide when to cut cost and when to increase income.

  4. I totally agree! I took a good look at my expenses and trimmed that down. then I took at look at my income and am finding ways to boost it.

  5. Excellent advice. Too many people overlook the earn extra income part.