When I was working to get out of debt after college I focused entirely on how to be more frugal. I wanted to save money as fast as possible. I thought that the best way to do so was by focusing on my spending and I completely ignored the earning portion of the equation. What took me a long time to realize was that sometimes you have to spend money to make money.
If I would have invested more time, energy and money into developing income streams other than my desk job, I may have been able to get out of debt sooner. Instead, I ate cheap dinners, limited entertainment spending and avoided purchases I really wanted to make. I scrimped and saved until I had enough to pay off my debt.
Tunnel Vision
When someone is faced with a large amount of debt, they tend to get tunnel vision. They may think, like I did, that the best way to save up money to pay off the debt is by minimizing spending. They cut back on amenities, use coupons, and reuse plastic baggies. These are all tactics you can use to reach your goals, but the alternative solution is to earn more.
Earning just $1 outside of your main job can be harder than just avoiding the spending of that same $1, but learning how to earn money on your own can provide more freedom for your life and open up options for your future.
Reluctance to an Initial Investment
The hesitation is often that you have to spend money to make money. Without the initial investment of money, it can be hard to get side income going. When you have to invest money that you should be putting towards your debts it can be easy to give up. You know you don’t have the extra money to spend so you quit before you even get started on a side project. Just remember, sometimes you need to spend money to make money.
(Don’t just take this as an excuse to go further in debt and buy things you don’t need, though. Make a fully educated decision on whether the money you are spending will actually lead to income.)
Examples of How Spending Money Helps You Make Money
Go to College: College graduates earn (on average) twice as much as high school graduates over their lifetimes. Graduate degrees increase earning potential beyond undergraduates and so on.
Buy Beginner Equipment: You can start to learn photography, music, computer, or art skills with an initial investment in the appropriate equipment. Once you spend money on the initial gear, learning then comes mainly from time and effort.
Build Infrastructure: Buying inventory of your product is necessary to make sales. Having a professional design done for your business’s website can help your brand and get more traffic to your website.
Invest in Your Future: By investing your money for retirement now, you will (theoretically) have more money later. In essence, you are “spending” it now because you can’t spend it on anything else, but you get to actually spend it for real later.
Treat Your Clients Like Friends: A simple gesture of sending a thank you card or buying a client a coffee at a meeting will demonstrate to them how much they mean to you and your company. Build a relationship with small investments and you will see large dividends in the long run.
Like I said before, you can’t just spend money on whatever you want and expect to get income. Have a plan for what you invest in and spend your money on.
Invest in possessions and you will go further into debt.
Invest in yourself and you may be surprised at how financially successful you can be.
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{ 8 comments… read them below or add one }
That’s a great point, Caleb, but it’s a really hard balance to strike.
My philosophy with managing debt is to work out a payment schedule so that you’re making solid progress towards paying it down, but beyond that point instead of focusing on cutting expenses, you should focus on increasing revenues, and earning power in general.
That being said, as entrepreneurs we probably have a lot more flexibility with our revenues, and room to grow them, than most 9-to-5ers, right? For them cutting costs might be a more important measure…
I agree that cutting costs is the best way to improve your finances as every dollar you don’t spend is a full dollar for savings. In turn, when you make a dollar there are taxes taken out.
I focused mainly on the spending part of the equation for almost 3 years and feel like I missed out on a lot of opportunities by just accepting what my income would be instead of trying to make it grow.
This is very hard to wrap your head around when you feel buried in a mound of debt. But anything worth having is worth investing in. If having a debt-free life is what one is after, than a combination of cutting expenses and earning more are needed! Another thought is investing in, not just retirement accounts, but also non-retirement mutual funds. It’s just like having a savings account but more aggressive so the hope is more interest will accumulate over time.
Absolutely Angela. Investing shouldn’t always just be for retirement. Short-term, aggressive investments can help you set aside money for your goals that you would otherwise spend frivolously.
Caleb,
I had the same idea in regards to being frugal with my spending. It didn’t lead to financial abundance. I have a wealthy friend who is very frugal with his money to this day. The difference is he was expanding and growing his business at the same time which he eventually sold for 10 million.
There really is two parts to the equation of becoming financially independent. You need to be responsible with your money (frugal) and you need to continue to create more income streams.
I’ve been hearing this a lot lately but it’s hard.
As an example I had the idea to use my golf site as lead generation tool for Golf Professionals in my province. Of course it takes money to work on SEO and after a couple of months of trying to rank I’ve give up.
There has to be some funds set aside and the risk has to be calculated. If it isn’t going to make money right away and you’re in debt or on a tight budget, you can screw yourself over even more.
Great point Jordan. The key is to spend money in the best possible way at the beginning, especially when you have other debts.