We now know that we should invest.
We know how to invest.
We know in what to invest.
But before we do any of that we need the cash to start!
The Secret Formula
If we want to invest more, we need to grow the gap between what we earn and what we spend.
That’s the basic formula. The difference between what you earn and what you spend is your spare cash. If you want to invest more (or save for big purchases) you need to make that difference larger.
By definition, then, you can grow that gap either by earning more or by spending less.
Earn More Money
First, let’s take a look at ways to earn more money.
There are two large buckets of approaches to make more money outside of your day job: active income and passive income.
The most obvious example of making extra active income is the side job. You could drive for Uber, do some freelance work, pick up a part time job, or any number of variations.
In taking this path you are spending more of your time and labor in exchange for some supplemental income. Generally this work will be lower paying than your day job, which is a negative. You also only have a limited number of hours in your week, so the upside is somewhat limited and you need to watch out for burnout.
On the other hand, you may find it to be a nice change of pace or you may enjoy the lower stakes. This type of work generally gives you better control over your hours. Plus, knowing that you have the ability to walk away at any time and still have your main paycheck helps avoid some of the stresses that generally come with paid work.
An option outside of the standard side gig options is creating a future passive income source.
This includes things like writing a book or recording music. A lot of time and effort are required up front and the compensation doesn’t come until later.
These can be great options while you are working a day job. Because you can rely on a steady paycheck from your job, you can plant seeds now and don’t need them to sprout instantaneously.
As for negatives, this type of work can be quite speculative. It is difficult to know how much money (if any) you will make down the line. You could plant seeds that never sprout.
However, if it works out you could be cashing checks in the future for work that has been completed for years. At that point you have income that doesn’t require any time to earn.
Earn More From Your Day Job
Most of the time when we look at earning more, we overlook the obvious answer. We spend so much time thinking of side jobs and passive income sources that we forget to try to maximize the income from our day job.
One option for this is to brush up on our negotiation skills and negotiate a raise. This allows us to make more money for the same amount of labor.
We can also spend more time networking, reading, and improving at our job. This requires some extra time up front, but gives us more leverage in negotiating a promotion or raise. Alternatively, it also puts us in a good position to move to a higher paying job at another company.
Similarly, we can work on certifications or degrees that are relevant to our work. This costs both time and money up front, but gives a big boost to your leverage in negotiations. This helps with both raises and new positions.
In addition to earning more, we can also grow the gap between earning and spending by spending less.
There are a lot of sources out there that will coach you on couponing, comparison shopping, or any number of other money-saving activities.
I don’t do any of that.
My approach is to focus on two big wins: avoid lifestyle inflation and cut spending that doesn’t make me happy.
Avoiding Lifestyle Inflation
Avoiding lifestyle inflation starts from a mindset of “Hey, my life isn’t too bad right now.”
This means that you don’t really NEED any of the extra cash from raises or bonuses or any other extra income. The majority of any unexpected cash – bonuses, inheritances, or whatever other windfalls may come our way – can go straight into investment accounts.
Additionally, at least half of every raise can go into investment accounts. If you were doing fine before, then you can manage with only a piece of your raise after.
Putting a Raise to Work
When I finished law school, I took a low paying fellowship. When they eventually brought me on full time, it came with a sizeable raise. I had been making ends meet before that raise, so I put all of the new money into retirement accounts. I went from saving nothing to saving a lot instantaneously.
Obviously large raises are not common in the modern economy, but the same concept can apply to whatever size raise you get.
(I would also note the caveat that this obviously only applies if you were able to make ends meet with your prior income. If you were falling into debt because your income was too low to live on, then you would need to get up to a living wage before being able to bank parts of any future raises.)
The ultimate question when looking to cut expenses is: Is this use of money making me happier? A follow-up may be: Is the amount I’m spending worth it?
My wife and I enjoy watching television from time to time, but Comcast was getting outrageously expensive. We canceled cable and signed up for Netflix and Hulu. We’re just as happy as we were before, and we’re saving $100/month.
Any place you can save money without costing happiness or time is a big win.
If you’re looking for inspiration, take a drive through our articles on money and happiness.
What Can You Do?
Obviously there are situations where you can’t cut anymore of your spending and it would be extremely difficult to earn more. If you’re working multiple jobs, you may not have the time to get certifications, hunt for a new job, pick up a side hustle, or comparison shop.
But if you’ve got the time to read blogs, there’s probably something that you could do to grow the gap between your earning and your spending.
Take a close look at your own situation and see if there is something that would work for you.
Join the Conversation!
How have you increased your income? Decreased your spending? Do you prefer one approach to the other? Let us know in the comments!