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Savings Rate 601: Increase Income or Cut Back Expenses?


What’s the best way to increase your savings rate? Cut back on expenses? Or increase your income?

Increase your savings rate in the short term by cutting back on expenses today. Cut expenses until you determine your spending threshold. Then increase your savings rate over the long term by continually increasing your income while holding your expenses constant.

You can’t spend less than zero dollars, but you can tap into limitless earning potential.

Optimizing both strategies will bring immediate growth to your savings rate while also securing its growth over time. As your income grows and your expenses remain constant, you’ll be able to reach financial independence quicker than any other way.

What is the Best Way to Increase My Savings Rate? Increase Income or Cut Back Expenses?

When it comes to your savings rate, there are many things you can do to help increase it. However, increasing your income will increase your savings rate more quickly than anything else you can do. Granted, it’s not easy to increase your income overnight. As a result, it’s best to start increasing your savings rate today by cutting back expenses. Decreasing your spending today will have an immediate impact on your savings rate, and the amount of time it’ll take you to climb your financial mountain.

Cutting Expenses to Increase Your Savings Rate

The main idea behind cutting expenses is that it has a direct correlation to your financial independence number calculations. For example, if your annual expenses were $50,000 a year, your financial independence number would be $1,250,000.

Annual Expenses: $50,000

Withdrawal Rate: 4% (which is 4 / 100, or 0.04)

$50,000 / 0.04 = $1,250,000

And there you have it! Your financial independence number: $1,250,000. 

This is the amount of money you need to be able to successfully retire and live off your investments. 

Now, if you were able to cut your expenses down to $40,000 a year, your financial independence number becomes $1,000,000 ($40,000 / 0.04 = $1,000,000). That’s $250,000 less that you’d need to have saved up in order to retire! And that’s the idea behind why cutting your expenses can be so powerful. The amount of time to it may take you to save $250,000 may be way more than the time it’d take finding ways to decrease your expenses by $10,000.

Perhaps spending $10,000 less annually sounds like a challenge, though. Well, it may be easier to achieve than you think. $10,000 a year breaks down to $833.33 a month. If you cut back on your three largest expenses (housing, transportation, and food) you may be able to get there more easily. If you found a cheaper place to live for example, or obtained some rental income by renting out an extra room, you could bring your overall costs down several hundred dollars. Taking public transportation to work or selling your car for a reliable used one can drastically bring down your monthly payments as well. Making home cooked meals and prepping lunches on the go can save you from expensive dine outs and convenience purchases. If you saved $350 on housing, $200 on transportation, and $250 on food costs each month, you’d have $800/month more in savings already.

And the impact it can have on your savings rate and the time it will take you to reach financial independence is dramatic. If your income was $75,000 and your annual expenses were $50,000, your savings rate would be 33% ($25,000 savings / $75,000 income = .33333 or 33.3%). Decreasing your expenses to $40,000 would increase your savings rate to 47% ($35,000 savings / $75,000 income = .4667 or 47%). This would lessen the time it takes to reach financial independence by 7 years.

Annual IncomeAnnual SavingsSavings RateAnnual ExpensesFI Number (Annual Expenses / 4%)Years to FI
Impact of decreasing expenses on Savings Rate

If you had a target to reach financial independence within 7 years, you would need to increase your savings rate to 75%. All variables held constant, that would mean that your expenses would need to drop to $18,750.

Annual IncomeAnnual SavingsSavings RateAnnual ExpensesFI Number (Annual Expenses / 4%)Years to FI
Decreasing expenses to achieve 75% Savings Rate

Herein lies the trouble behind continually cutting back your expenses.

While it is good to curve spending to reasonable amounts, it’s unwise to cut spending below the threshold it takes to maintain the basic standard of living. Though possible, it would take some very drastic lifestyle changes in order to live off of $18,750 annually. And to do so at the cost of your health or safety would make the effort in vain.

Remember, the math behind the 4% rule implies that your expenses equate to the lifestyle you intend to have in retirement. If you plan to live off of $18,750 annually every year until the day you die, then ensure that your lifestyle is worth living at that spending level. If, however, you find that your spending threshold is higher than that, be realistic with yourself. It’s hard to be frugal, and life is to be enjoyed. You don’t need to eat out every night, but if your family is growing and so are your expenses, do what you need to do to create a happy life for you and those around you while you have time to live it.

Does that mean your 7 year goal to reach financial independence is impossible? Not exactly.

Increase Income to Increase Your Savings Rate and Reach Financial Independence

While it gets increasingly difficult to save when cutting back expenses, it gets easier the more money you have available to spend. The more you try to cut your expenses, the harder it is to reach each increasing savings rate percentage point. You can’t spend less than $0. You can, however, increase your income by more than 100%. That means the potential to make money is more practical than the changes you can reasonably make to decrease spending over time.

To illustrate this point, let’s use our example from before. If you had an FI target of 7 years, you’d need to have a 75% savings rate. Let’s say you can’t decrease your expenses to $18,750, and instead found that $50,000 was your spending threshold. Increasing your income to $200,000 from $75,000 would yield a 75% savings rate ($200,000 annual income – $50,000 expenses = $150,000 savings. $150,000 / $200,000 = .75 or 75%).

Annual IncomeAnnual SavingsSavings RateAnnual ExpensesFI Number (Annual Expenses / 4%)Years to FI
Annual IncomeAnnual SavingsSavings RateAnnual ExpensesFI Number (Annual Expenses / 4%)Years to FI
Increasing your income will allow you greater mobility with your spending threshold.

True, it may be difficult to wake up $125,000 richer tomorrow morning, but one thing you can do is decide that tomorrow will be the beginning of your ‘Increase Income’ mountain climb. Simply knowing what your goal is will help you find ways to reach it. Additionally, you can take comfort knowing that the life you’ve worked so hard to provide for doesn’t have to change.

The main point about increasing your income to help increase your savings rate is that your expenses shouldn’t change as your income grows. It’s tempting to inflate your lifestyle as your income grows. But it doesn’t need to. If you’re perfectly happy with your life at a $50,000 spending level, there’s not a huge reason to change it. Spending more won’t make you happier. Instead, ensure that your spending intentionally improves the quality of your life. Be deliberate. If you don’t need more don’t spend more. Optimize your spending to avoid waste and be a responsible consumer. But don’t put yourself in harms way to reach goals in unrealistic ways. Find tangible ways to achieve those goals

How to Increase Your Income and Increase Your Savings Rate

Now that you know that you don’t need to compromise your quality of life to increase your savings rate, you’ll want to begin finding ways to make more money. Remember, there isn’t a limit on your earning potential. It has an infinite upside compared to the diminishing downside of saving.

While there are many ways to make money, you’ll want to balance both short-term and long-term income earning strategies. Here are a few simple ideas to help you expedite your journey to financial freedom. 

Short Term Strategies to Increase Your Income

Ask for a Raise. Speak with your boss to see how you’re performing at your company. Do some research to understand your value on the market, and come prepared with your findings. Ask for a percent increase instead of a dollar amount. Humans generally consider percentages as smaller than dollar amounts, and it may make asking for your raise easier.

Get Promoted. Take some courses to learn or deepen your skills. Get certifications for your discipline. You can even learn entirely new skills to make yourself more valuable for a role that’s higher paying at your company. Transitioning within your company may be an option if a promotion is harder to reach. Move horizontally, vertically, or a little bit of both within your organization to access additional income.

Make Money Online. Inventory your things and sell them on eBay or through consignment shops or websites. Freelance your skills to markets that need them. The internet can be an incredible pool of customers to tap into for your services right now. Turn your hobbies into cashflow.

Long Term Strategies to Increase Your Income

Side Hustle. Find projects you can take on outside of work. Walk dogs, tutor, become a freelance writer, etc. You may also find ways to make money doing something you love, like photography or painting. Work for someone or work for yourself if you’re looking for greater flexibility with your time.

Start a Business. If you want greater flexibility with your time, start a small business. If you have an idea for a product or service, begin setting it up on your off hours. The idea here is to create leverage with your time. Is there a skill you have that you can digest into a course? Is there a product you can create that solves a specific problem for people? You can build something once and sell it infinitely – to anyone that finds value in it!

Create Passive Income Streams. Developing a passive income stream means setting something up that can provide income to you perpetually with little to no effort on your part. Set up your future business in a way that will require less of your time while still providing you a constant stream of income. You could rent out your properties and have a company manage them, or become an Airbnb host. You could write a book and receive royalties on it after publication. You can make music and do the same thing. You can build an app for people or receive ad revenue on a website you’ve made. Your efforts setting up passive income will pay dividends on your time and your income.


You can’t spend less than $0. You can tap into an infinite amount of earning potential. Start today by cutting back your expenses and finding your spending threshold. Once you find the level at which you can have a consistent and maintainable standard of living, hold to it. Begin increasing your income without increasing your savings. The more you make, the more you save, the faster you will reach financial independence. And the sooner you will summit your financial mountain.

More Savings Rate Articles

If you’re hungry to learn more about your savings rate, we’ve put together a comprehensive guide for you that will teach you everything you need to know.

Ultimate Savings Rate Guide: Everything You Need to Know

Looking for deeper dives on a particular subject? Check out the rest of the articles from our Savings Rate series.

Savings Rate 101: How to Calculate Your Savings Rate

Savings Rate 201: How to Beat the Savings Rate Next Door

Savings Rate 301: Avoid These Pitfalls With Your Savings Rate

Savings Rate 401: How to Determine the Best Rate For You

Savings Rate 501: The Best Ways to Increase Your Rate

See you at the top of your financial mountain.

Climb on, FinBase.

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John is a personal finance writer, editor, and a fellow FinBase climber. Tech worker by day, design owl by night, he is the co-founder and creator behind The Financial Basecamp.
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