You know you need to get a better handle on your finances by controlling your expenses and creating a budget that you can stick to.
You pay your bills every month and hopefully have a little money left over, but it sure would be nice to have more discretionary income to play with, wouldn’t it?
But you don’t know where you should focus your efforts.
Should you concentrate on cutting expenses and saving more money?
Or should you focus that energy on creating additional revenue streams to increase your income?
There are no shortage of opinions out there. Everyone has their own opinion but most of them are wrong because they only look at part of the equation.
To give you an idea of what I mean, look at the simple cash flow equation below (don’t worry, we’re not getting into any complicated math here!)
X – Y = Z
X is your income. Y is your expenses. Z is whatever you have left after all your bills are paid.
That’s simple enough isn’t it?
Your goal should be to increase Z as much as possible. You can do that by increasing X or by decreasing Y. Either of those will give you a greater value of Z.
In other words, they both work.
But which works better? Let’s take a closer look at each.
To start, let’s plug some real numbers into that equation above.
$5,000 – $4,800 = $200
In this example $5,000 is your monthly income. Your expenses come to $4,800. Once all your bills are paid you have $200 left. That’s better than being in the hole each month but to reach your goals you need to increase that $200 as much as possible.
Some money experts will advise you to do whatever you can to reduce expenses. They argue that by decreasing your bills you’ll have more money left over to pay down debt, invest, or do something fun with.
And they’re right.
Let’s say you ditch cable television, cut back on dining out, and trim some other bills so you’re able to save an extra $300 a month. Your cash flow now looks like this…
$5,000 – $4,500 = $500
That’s awesome! You’ve more than doubled your discretionary income overnight.
Now let’s look from another point of view.
What if you love eating out and you don’t want to live without cable. You can keep those expenses just the way they are but you’ll need to find another way to increase discretionary income.
So you start using your free time to take online surveys, do some mystery shopping, and sell crafts on Etsy and you make an additional $300 per month.
Here’s what your cash flow looks like now:
$5,300 – $4,800 = $500
The net result is exactly the same. You just went about it in a different way.
Sure it required a bit more work on your part but you still get to enjoy Game of Thrones and dinner at The Olive Garden.
An Even Better Way
So if you can get the same results by either saving more or earning more, which is the best way?
The answer is both.
Why do only one when you can do both?
Think about it. If you can trim your expenses by $300 AND also increase your income by $300 you get the best of both worlds and your discretionary income can skyrocket.
$5,300 – $4,500 = $800
By combining both methods the results can be truly astounding.
If you take a close look at your budget I guarantee you can find some unnecessary expenses you can live without. Get rid of those and you’ll see an immediate impact.
But there is only so much you can cut out of your budget. Eventually you’ll be eating nothing but ramen noodles and lima beans, and who wants to live like that?
That is why increasing income is just as important as cutting expenses.
You see, most income opportunities take some time before you see any results. For example, starting a blog today won’t likely result in any immediate income. But six months down the road you could be bringing in some extra cash to pad your budget.
And the potential is so much greater when it comes to earning more. If you’re really motivated the sky is the limit.
Saving more and earning more are both important goals and focusing on either of them will help your financial situation. But doing both will have the greatest impact.
Cutting expenses will have the most immediate impact but over time you’ll soon run out of things to cut and you’ll live a sparse existence.
Earning more will take some time and upfront work but the long term potential is unlimited.
Keep increasing your discretionary income and everything else will fall into place.