Make Your Money Grow Faster: Investing Better vs. Earning More

Make Your Money Grow Faster Investing Better vs. Earning More

Photo courtesy of J R

We all have long-term goals, many of which require money. Maybe you’d like to pay for your child’s education. Maybe you want to save up for a down payment on a house. You almost certainly would like to retire someday.

With any of these long-term financial goals, the chances are high that you’re not doing them exactly as they’re scripted in the textbooks: starting at age X, finishing at age Y with Z dollars accumulated. Perhaps you’re starting late and you need to catch up. Or maybe you’re starting early and would like to hit your goal sooner. Whatever your particular circumstance, there is often a desire to find a way to make your money grow faster so that you can meet your goal along the timeline that fits your needs.

So what’s the best way to do it? Well, I ran I little experiment comparing two options: investing better and earning more. Let’s find out which one is more effective.

More effective than what?

Before we evaluate the different ways to grow your money faster, we have to define the baseline. In other words, where are we starting from that we want to improve upon.

The first baseline is the regular contribution you’re currently making towards your goal. For example, you’re probably contributing a certain amount of money towards retirement every year. This number will be different for everyone.

The second baseline is the return you can earn on your investments with little effort. For an example of how you can invest very effectively with little effort, read this: How to beat 80% of investors with 1% of the effort. For simplicity’s sake, we’ll assume that you can earn 8% per year with an index fund tracking the US stock market.

So the baseline is your current contribution earning an 8% rate of return.

Setting up the experiment

To beat this baseline, you will have to either contribute more money or earn a higher rate of return. Assuming you’re already living by a budget that’s tailored to your current income and needs, you won’t have much room to cut spending in order to increase contributions. That leaves you with two choices:
1. Earning more, in order to increase contributions, or
2. Investing better, in order to increase returns

To test the two options against each other, I decided to create a spreadsheet and run some cold, hard numbers. You can see the spreadsheet and play with the numbers yourself here: Earning More vs. Investing Better.

Before getting into the results, let’s take a look at the variables I included:

Baseline Annual Contribution: The annual amount you will contribute, before earning any extra money.

Baseline Return: The investment return you could earn with a completely passive investment strategy, such as the one advocated here: How to beat 80% of investors with 1% of the effort.

Better Return: The investment return you could earn if you were to devote your extra time to beating the markets.

Weekly Hours Investing Better: The number of hours per week it would take you to earn that extra return on your investments.

Hourly Rate for Earning More: The hourly rate you could earn if you instead spent that extra time working.

For the default example in the spreadsheet, I assume that you could beat the market by 2% every single year. I also assume that it would take 20 hours per week devoted to investment research in order to do so.

Finally, I assume a $10 hourly rate if you instead spent that time working for additional income, and that all of that extra income is dumped into your investments at the beginning of the each year (except for the first one, since you haven’t worked that extra time yet).

I did not attempt to take taxes into account on either the investing or earning side.

So which is more effective? Investing better or earning more?

The results ended up being pretty clear. Here is your ending balance in each scenario after 1, 5, 10, 20 and 30 years:

earning more vs. investing better

Clearly, it ends up pretty strongly in favor of earning more. Using these specific variables, you end up with almost 33% more money when you spend your time earning more money rather than trying to invest better and beat the market. You can spend some time playing with the variables yourself, but almost any realistic numbers I plugged in came to a similar conclusion.

How do you use this information to spend your time productively?

Clearly, these numbers alone argue strongly for the course of using a simple investment strategy and spending your extra time working on increasing your income. The simple math says that even if you ignore all other factors, this is the best route for speeding up the growth of your money.

But I don’t want to ignore the other factors. I think there are some additional reasons to focus far more on the earning more side of things than investing better.

Increasing earnings is more likely

While I’m not going to pretend that it’s easy to start earning more money, it’s certainly much more likely to happen than increasing your investment returns.

In the example here, I assumed only a $10 per hour wage. Many people could earn close to this simply by negotiating a raise, without any extra hours put in. There is also the opportunity to find some part-time work. Entrepreneurial types might try to build up an income-producing side business. Each of these things might take some time before they pay off, but they’re very doable.

On the other hand, beating the market with your investments is very unlikely. Even the majority of professionals, who dedicate their entire professional careers to earning superior investment returns, fail to do so. A recent study actually found that a simple index-oriented strategy like the one in our baseline above beat active investors (those trying to beat the market) over 80% of the time. And even when the active investors did win, it was by an average of only 0.52%. So the 2% out-performance we assumed in our example was extremely generous and therefore extremely unlikely.

Increasing earnings is more consistent

If you’re able to increase your earnings, the likelihood of those earnings staying consistent is pretty high. Think about your job now. Sure, there’s always the chance that you might lose, but by and large you earn the same paycheck month after month. There isn’t much variability and there isn’t a big chance that you would lose those extra earnings unless you chose to do so.

With investing, it’s almost exactly the opposite. First of all, no matter how good you are your returns will vary dramatically from year to year. That’s simply a function of investing in the markets at all. No one has only positive years with no negative years, especially if they’re trying to outperform the market.

But even more importantly, the same research above showing that very few investors are successful at beating the market also shows that the ones that do over one period are very unlikely to do so again over the next period. That is, very very few investors consistently beat the market over many years. So even if they actually could beat the market by 2% over a few years, it’s very unlikely that they could sustain it over the 30-year period used in our example.

The bottom line is that once you increase your earnings, you’re likely to sustain that increase. An increase in investment return is likely to be temporary, if at all.


If you want to speed up the growth of your investments, the best way to do so is to increase the amount of money you earn and put it into your investments.

Follow-up: If you’d some guidance on how to create a “good enough” investment plan for the money you’re saving, check out my book: Smart Investing for Your 20s and 30s.

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52 Comments... Read them below or add one of your own
  • DC @ Young Adult Money October 28, 2013

    Great analysis, Matt. I’m in the “earn more” camp and I’m a big advocate of people increasing their earnings or creating new/additional income streams. It’s really benefited me financially as well as introduced me to people I wouldn’t have met and skills I wouldn’t have learned and developed. I don’t really make time for looking into different investments. Instead, I make sure I am making regular contributions and try to not make trades based on short-term stock movements or news.

    • Matt @ momanddadmoney October 28, 2013

      That’s a solid plan DC. Sounds like your firmly on the side that seems to be much more effective.

  • moneystepper October 28, 2013

    Good comparison. Nice to confirm my suspicions in these matters. Better start earning some more income!!

    • Matt @ momanddadmoney October 28, 2013

      Haha, only if there’s a reason for it! If you’re already on track then there might not be a need for either.

  • Grayson @ Debt Roundup October 28, 2013

    Awesome experiment Matt. I like how you put this together. I do think earning more is the way to go, but that doesn’t mean you can’t do both. If you are good at doing multiple things at once, why not work on earning more and investing better?

    • Matt @ momanddadmoney October 28, 2013

      My opinion would be to work on investing to the point that you’ve optimized all of the important things: low-cost, market-mimicking, regular contributions, an asset allocation you are comfortable with. In other words, set yourself up to get the best possible return at the risk-level you want.

      But once you have all that set up it can run largely on auto-pilot. Past that point it would seem that it’s much more likely to hurt you to try and focus on both. After all, if one is shown to be more effective, AND it’s shown to be more likely, why would you spend time focusing on the other? It would seem like that would just be self-defeating.

  • Alexa Mason October 28, 2013

    Awesome experiment, Matt! I am about ready to invest and pretty excited about it, too! I have never worked for an employer who offered a retirement account and have put my extra money to other goals so far. Since my Efund is almost in place I am earmarking a new savings account for investing. I want to open up a Roth IRA but I also want to save for an investment property. I am excited that I am finally to the point where I’ll have extra money for these things.

    • Matt @ momanddadmoney October 28, 2013

      Nice work Alexa! It’s definitely exciting to be at a point where you can get started. I’m actually working on a post for next week that answers your question about where to start when you don’t have a lot of money to invest. Hopefully that will be helpful. You’re in a great spot now with your full-time freelancing to give yourself some cool opportunities.

  • Andrew October 28, 2013

    I’m definitely in the “earn more” camp as well. Just because you spend more time researching investments doesn’t mean you will have a better return. Earning more money is a clear cut winner I think. Since I work in government and they just give raises based on seniority, the only way for me to earn more is a side hustle or part time job.

    • Matt @ momanddadmoney October 28, 2013

      Is that frustrating to have your pay so tied to length of employment? There are obvious benefits to working a government job, but I could see that part of it being difficult.

  • Tonya October 28, 2013

    Thanks for putting that all together. Of course its a little of both but I agree that if you can take the time to try and earn money its worth it. Too many people advice to cut spending, but we all have the potential to make side income or in my case, more freelance income if we really want to.

    • Matt @ momanddadmoney October 28, 2013

      I think it’s a matter of both to a certain extent. There are certainly proven ways to invest better and it’s definitely worth the time to figure out what those are. But once you’ve got that figured out investing actually requires fairly little maintenance and it’s really worth your while to focus on other things, whether that’s earning more or whatever else you want to enjoy.

  • Mrs PoP @ PlantingOurPennies October 28, 2013

    Interesting analysis – and it doesn’t even take into account the fact that unevenness in investment returns would probably increase pretty dramatically the more you tried to play around and beat the market.

  • Debt and the Girl October 28, 2013

    I def. would like to get into more investing. I have been collecting info here and there from other bloggers and its been really interesting so far. Right now I need the liquid cash more.

    • Matt @ momanddadmoney October 28, 2013

      Honestly I think it’s great that you recognize that. A lot of people get frustrated with low interest rates and start risking their needed cash in search of better returns. But having cash is incredibly important to keep some stability in your life. Best to wait until you’re ready.

  • Ree Klein October 28, 2013

    What an interesting approach, Matt! I love the spreadsheet and conclusions. The trick for most people who live on a budget is to apply the extra income to savings/investment. The temptation for many is to feel relief from the burden of living on a tight income and end up spending that extra money.

    The best way to avoid that is to automate savings to take that extra money off the table. As soon as you know you’re getting a raise, adjust your deductions to carve that additional money out for 401k contributions or other savings outside of retirement. Out of sight, out of mind.

    Thanks for the awesome material!

    • Matt @ momanddadmoney October 28, 2013

      I’m a huge fan of automation and I’m also a huge fan of using raises to increase my savings. Although I also think there’s room for balance and you can use part of the raise for savings and part for fun. But learning to enjoy your life as is and using any extra money to grow your wealth is certainly a very powerful tool.

  • MyMoneyDesign October 28, 2013

    This is exactly why I look at my stocks about once per year, make my purchases, and then don’t really do much else until next year. Investing in indexes, what you know will work, and what will yield just as much as an index is really about the best you can do as an average investor. Unless you are Warren Buffett and plan to buy the whole company or all of their shares, forget it.

    • Matt @ momanddadmoney October 28, 2013

      Great approach MMD. A good investment plan can be largely unmonitored for long periods of time. Rebalancing and big life changes are really the only reasons where any trades might need to be made.

  • E.M. October 28, 2013

    Interesting read! Earning more has been on my mind lately, though I would rather put time into my blog right now than get a part-time job. When push comes to shove, extra money is always nice, and diversifying income is always good to do.

    • Matt @ momanddadmoney October 28, 2013

      There’s certainly no obligation to do either of these things. If you’d rather spend your time on something enjoyable (which may earn some money down the road), by all means go ahead and enjoy!

  • Deacon October 28, 2013

    Great point on increasing your earning potential rather than focusing on investment returns. Since I am self-employed, this is on mind almost weekly.

    • Matt @ momanddadmoney October 28, 2013

      Have you set up any kind of retirement account for yourself? We’ll be setting up a Solo 401(k) for my wife for the first time this year.

  • Kali @ Common Sense Millennial October 28, 2013

    Really impressive! This was a smart experiment and made for a great read. It definitely motivates me to work harder at earning more, as it was the clear winning strategy here.

  • Done by Forty October 28, 2013

    Whew! I was worried the results might have come out differently, and that readers might try to go and chase that 2% above baseline (and likely end up somewhere around 2% behind).

    I go back and forth on the earning more stance. It obviously has some huge benefits since it allows the frugal person to invest a lot more. But there’s also a point at which the hours invested in side hustles+regular job would be better spent on other activities. I’m pushing to start doing some side hustle, but I’m capping it at around one hour per day, seven per week…and I’m going to have to charge a buttload. Like, really unreasonable figures.

    • Matt @ momanddadmoney October 28, 2013

      I’m not trying to argue that you should necessarily be doing either of these things. If you’re already on track for your goals then there’s really no need. I’m excited to see what “really unreasonable figures” are though. I think that could be a catchy tagline for your business.

  • Brian @ Luke1428 October 28, 2013

    I agree with this completely. You can spend all that time and do the best stock research possible and still get messed over by a market that is acting irrationally. Earnings from your job will continue to accrue and be stable even when the market is funky. Great post!

  • Jacob @ iHeartBudgets October 28, 2013

    And don’t forget, you might have a higher expense ratio and MANY more taxable trades with all that “research” and moving about the market that you’re doing. I’m all about doing 3 things; 1) Budget well and cut unnecessary expenses 2) Invest in index funds 3) Find ways to make more money. The first two are much easier than the last, but they all work very well together to move toward financial independence and wealth.

  • Kyle James October 28, 2013

    Great analysis. I’d much rather work on increasing my income then spend time trying to be “good” at investing. I leave that to my financial adviser who I trust. I think I’d have better luck at trying to be good at blackjack.

  • Lance@MoneyLife&More October 28, 2013

    I like earning more when there is a purpose, but if you’re just earning more money to have and hoard more money then it can be counterproductive. I definitely think you’re better off investing more than trying to get a higher rate of return though.

    • Matt @ momanddadmoney October 28, 2013

      Totally agree. I only think it’s worth pursuing if it will truly help you advance your goals. As you say, income for its own sake is pretty empty.

  • Kim@Eyesonthedollar October 28, 2013

    I think it’s important to pick the very best investments, but I do believe, for the majority of investors, that lies in pretty simple index fund choices. When people think they are going to beat the market or have a hot tip, that would spell trouble in my book. I am a strong believer in earning more, often by working smarter, not necessarily harder, like in your example of negotiating a raise. I think anyone can earn extra money at something, even if it isn’t related at all to their day job. Sometimes the side hustles can do better than a day job, a fact I would have never believed until I started reading PF blogs!

    • Matt @ momanddadmoney October 28, 2013

      I’m with you there. The number of side hustles the in PF world is pretty inspiring. I’ve been exposed to so much since joining this community.

      As for investing, I completely agree. There’s an extent to which it makes sense to optimize what you’re doing, but that will only take so much time and effort. Beyond that you’re either running in place or likely hurting yourself. And I also like your point about working smarter, not necessarily harder. Easier said that done, but a great goal.

  • krantcents October 28, 2013

    Concentrating on your career to earn more is one of the best ways to increase your earnings.

    • Matt @ momanddadmoney October 28, 2013

      Agreed. Sometimes the best path towards growing our wealth is right in front of us.

  • Thanks for pointing this out Matt, earning more is the best way to have more savings and to have an investment. And now I’m thinking that I need to find ways on how to earn more. 🙂

    • Matt @ momanddadmoney October 29, 2013

      Only if it helps you reach a goal. If you’re fine as is, then maybe there’s no need to do either. But if you’d like to make things move a little faster then earning more is a great tool.

  • Holly Johnson October 29, 2013

    I like to think that I’m in the “earn more,” “spend less,” and “invest” camps. I don’t take any extreme measures but I do a little of each and it works out well.

    • Matt @ momanddadmoney October 29, 2013

      Ahh, the good old “balanced” approach. Definitely a healthy way to go about things.

  • Debt BLAG October 29, 2013

    This is terrific post and a point I try to get across to friends.
    I’ve got a post coming next Wednesday about why millennials should stop wracking their brains trying to get the best rate of return and just use that mental power putting away as much as possible. Except mine will be on chasing interest rates (say 1.0% v 0.9%) on savings accounts rather than just making small frugality fixes. Will definitely link back to this. Thanks.

    • Matt @ momanddadmoney October 30, 2013

      Thanks Mario! Interest rate chasing is definitely one of those things that’s largely a waste of time. How much difference will a tenth of a percent really make? Especially another bank will come along with a better interest rate within a few months. Looking forward to your post.

  • Lisa vs. the Loans October 30, 2013

    I’m definitely on Team Earn More and I’m glad this analysis is here to back me up!

  • Laurie @thefrugalfarmer October 31, 2013

    More great stuff here, Matt!!! Our internet service was out from Sat. AM till yesterday AM, and I am SO glad to be able to have my PF fix back – I’m in serious withdrawal, and this was a great article to get me back on track. 🙂

    • Matt @ momanddadmoney November 1, 2013

      Thanks Laurie. Glad to have you back! A life without internet? How did people do it?

  • Samee Ullah Feroz April 17, 2014

    I wanna start it but what is its minimum investment? let me know please thanks

    • Matt @ momanddadmoney April 17, 2014

      Hi Samee. Could you please clarify what you mean by minimum investment? I’d be happy to help if you can be a little more specific about what you’re asking. Thanks.

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