Why Saving Before Spending is a Better Idea

Jacob became financially independent at age 30 by reducing his expenses and saving and investing 75% of his paychecks to provide enough passive investment income for the rest of his life. He no longer works for a living. He blogs about how to reach financial independence and many other things on Early Retirement Extreme.

It is unfortunate that many people buy homes, cars, get married and start families without having established the necessary economic foundations first. Instead, it is very normal to make up for this by borrowing the money to get started and thereby spending one’s working life paying off loan after loan because the habit of saving the money first before spending never gets fully developed.

As a consequence of not saving before they spend, consumers spend anywhere between five percent and 20 percent of their income on interest. This money could easily have been used to double their retirement savings or increase their fun budget.

What makes it senseless is that this money is frivolously wasted away simply because the money is not saved first. We have two cases:

• Earning first = Spending later + interest
• Spending first = Earning later – interest

In the first case, a normal person earns his money before it is spent. As the person is saving up the money to spend it earns interest which means either working less or spending more. Both are great outcomes.

In the second case, a struggling person borrows money so he can spend it without having earned it. In return, the person must work to pay the money back plus interest. This either means that the person must work harder and live with having less to spend. Both are bad outcomes.

Unfortunately for many, they begin spending before earning right out of college. Some buy a car before they have saved the money. Some buy TVs and computers without having earned the money. This puts them on the hook every time they repeat this behavior and consequently they have to work longer and harder than someone who simply saves his money before he spends it.

If this sounds obvious, it is because it is obvious. However, there is a big difference between knowing this and resisting all the tempting offers to borrow money to instantly gratify. Do your future self a favor and save the money before you spend. Never spend other people’s money. You’ll just be indebted to them.