What matters more—earning more or saving more? If you had to choose only one, which would you pick?
Some people, especially those who are naturally frugal, believe that the key to financial freedom lies not in how much you earn, but in how much you manage to save. On the other hand, there are those who emphasise increasing their income through side hustles. MLM marketers and e-commerce gurus, for example, often showcase flashy cars and expensive watches to showcase the success their income streams have brought them, to convince you to likewise aspire towards these luxuries by working with them.
So, who is right?
The truth is, it depends on your personal financial goals, aspirations and lifestyle choices.
Buying Your Dream Home
Let’s start with something simple that many of us in Singapore want—a nice home.
Whether your dream home is a freehold landed property, a 4-bedroom condominium at an integrated development or a resale HDB flat that is large enough to accommodate your “Large Family”, chances are that your ability to afford your dream home has a lot more to do with how much you earn, rather than how much you can save.
This is because, for most home purchases in Singapore, home buyers are likely to use savings from their CPF Ordinary Account (OA) for their down payment and take a home loan to finance their home. For this, both your CPFOA savings and the home loan you can take depend mainly on your income.
Thus, if your goal is to afford the dream home for your family, it’s likely that your earnings will play a bigger role than your savings.
Your Lifestyle Choices
The same logic applies to the lifestyle choices we make. Many of the “wants” we spend on are often available to us because of how much we earn, rather than how much we save.
For instance, if we choose to take annual holidays in Japan or Australia, it’s likely because our income allows us to do so. If we decide to buy a nice car, it’s usually because we can afford it and choose to buy it. The same goes for luxury items like branded clothes and bags, or opting for private healthcare instead of subsidised public care.
This isn’t to say we should spend more just because we earn more. As responsible individuals, we should spend wisely, if we can afford it, on the areas that are important to us. Lifestyle inflation is a genuine concern, and the choices we make will inevitably affect other areas of our financial lives. However, the key point here is that the ability to make certain lifestyle decisions is more closely tied to how much we earn than to how much we save.
Transitioning From Dual Income To Single Income
Given the high cost of living in Singapore, it’s only natural that dual-income families with children tend to find it more financially comfortable than single-income households. But how can couples transition from being a dual-income family to relying on a single income, especially when living expenses typically rise after having children?
In such cases, both earning more and saving more become equally important.
For the working spouse, the ability to earn a higher income will be critical in providing for the family as the sole breadwinner. At the same time, families planning to transition to a single-income household will need to monitor their expenses and cut back on unnecessary spending closely. This is one of those situations where both earning more and saving more are equally vital to achieving financial stability.
Early Retirement
For some people, achieving early retirement is the ultimate financial goal. But what does it take to get there?
Short of inheriting a windfall or striking the lottery, the journey towards early retirement typically requires building a passive income stream that can comfortably cover your monthly expenses. In this case, saving and investing more will likely have a greater impact on your ability to retire early than simply earning more.
This is because when you save (and invest) more, you not only grow your wealth, but also reduce your monthly expenses—a double advantage.
For example, consider a 30-year-old earning $5,000 a month, or about $4,000 after CPF contributions. If this person saves $2,000 a month (50% of their take-home pay) and invests it at a 7% annual return over 20 years, they would accumulate approximately $983,892 by the age of 50. Using the 4% rule, they could withdraw around $39,355 per year, or about $3,279 per month—enough to cover their $2,000 monthly living expenses.
Now, imagine the same person saves only $1,000 a month instead. After 20 years, their portfolio would grow to about $491,945—half the amount of the earlier scenario. Based on the 4% rule, they could withdraw approximately $19,677 per year, or $1,639 per month.
However, by saving less, their monthly spending would also increase to $3,000, not $2,000. This means they would need an even larger portfolio to sustain early retirement.
This example highlights why saving more, rather than earning more, plays a crucial role in achieving early retirement. Saving more not only builds your investment portfolio faster, but also significantly lowers the amount you need to retire comfortably.
Earning & Saving More Are Both Important
From a financial perspective, both earning more and saving more are essential and beneficial. Maximising both gives us the best chance of successfully achieving our financial goals. However, it is also important to differentiate which is more critical depending on what we want to achieve.
If your goal is to own a lovely, big home, simply saving diligently on a modest salary may not be enough, as you will likely need a higher income to afford it. On the other hand, if your goal is early retirement, earning a high salary without saving enough will also not get you there.
Understanding the role that earning and saving play in relation to your specific goals is key to planning effectively for your financial future.
Read Also: Guide To The 50/30/20 Budget Rule, And How It Helps You Save For The Long-Term
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