First Person: The Downsides of Spending Less Rather Than Earning More

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In a tough economy there may be little choice but to reduce expenses rather than try to earn more money. However, with the Internet opening up a variety of money-making options, a little side income might not be out of the question either.

While the thought of spending less money might not have many immediate detractors, as someone who has worked hard over the years to cut costs while at the same time struggled to earn more income, I can tell you first hand as a self-employed person who has taken a significant pay cut compared to when I was with a regular employer, there can be downsides, some of which can be significant.

Social Security Issues

Earning less income over time can have a huge impact upon the eventual Social Security benefits I can expect to receive. With 6.2 percent of each dollar I earn going toward Social Security, and another matching 6.2 percent being added from an employer (which in my case is me), we're talking over 12 percent of each dollar I make -- or don't make in this situation -- going toward a future "retirement plan" so to speak.

Current forecasts put the Social Security trust fund only being able to pay out about 75 percent of current government estimates by 2033, but as reported by The New York Times, "…the Social Security Administration underestimates how long Americans will live and how much the trust funds will need to pay out - to the tune of $800 billion by 2031, more than the current annual defense budget - and that the trust funds will run out, if nothing is done, two years earlier than the government has predicted."

So while ditching extra contributions to the fund by way of a lowered income could hurt if changes are made to the system, if nothing is done, it could actually be looked at as somewhat of a positive, especially for younger people such as me who still have multiple decades until we can begin collecting such benefits.

Investment Options

With less income, there's less money to be invested. I can't really go around putting money into IRAs or buying stocks with coupons, so this can be a downside of a lower income. While finding ways to cut costs can certainly help maintain our lifestyle on less income, it leaves little extra cash for investing for our futures. And should an opportunity -- such as buying silver or gold when prices plummet or jumping on a hot piece of land or real estate -- come along, even if we want to invest, depending upon the initial buy-in, we might not have the means to do so.

In such situations, there are options such as micro-investments (investments that earn money but that don't require much of an initial investment). While I might not get rich from saving nickels or pre-83 pennies in hopes that I will one day be able to collect their melt value or buying a $50 savings bond, every little bit helps when it comes to surviving on a lesser income.

Retirement Plans

There is also the aspect of retirement planning to consider when it comes to earning less. With a lower income, less of that income is likely to flow into retirement plans. This in turn can affect any employer matching contributions…a double whammy so to speak. While a few thousand dollars each year might not sound like a lot, over time, and factoring in things like dividend reinvestment and rising stock or fund prices, it could equate to tens or even hundreds of thousands of lost dollars over time.

For example, contributing $4,000 a year to a retirement account, with a 50 percent employer match would equate to $6,000 a year. Such an annual payment, earning a compounded 5 percent a year for 30 years, could add nearly $400,000 to a retirement account balance.

So while spending less rather than earning more can certainly save money over time, there can be some substantial downsides to not finding the proper balance between the two.

*Note: This was written by a Yahoo! contributor. Do you have a personal finance story that you'd like to share? Sign up with the Yahoo! Contributor Network to start publishing your own finance articles.

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The author is not a licensed financial professional. The information provided in this article is for informational purposes only and does not constitute advice of any kind. Calculations have not been verified by a financial professional. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.


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