A Penny Saved is a Penny Earned is Not Right

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A Penny Saved is a Penny Earned Definition

The phrase “a penny saved is a penny earned” is most frequently attributed to Benjamin Franklin. The idea is to encourage you to save more money as it’s the same thing as the money that you earned. It highlights the usefulness of saving as it is the same thing as making more money. However, it is incorrect because it discounts taxes.

The premise and the underlying rationale behind the saying is intriguing. The FIRE community should be rallying behind the saying and applaud Benjamin Franklin for coming up with such a saying!

There is debate whether Benjamin Franklin actually said the saying “a penny saved is a penny earned”. He actually wrote in Poor Richard’s Almanack: “a penny saved is two pence clear”. Therefore, It’s a modernized version of what the founding father intended to say.

Notwithstanding, it is simply wrong to say that a penny saved is a penny earned. We should explore the ideas behind it even further. While I do advocate for saving as much money as you possibly can, I don’t advocate for incorrect sayings.

The short answer? Taxes. Before you leave after finding out the answer, I encourage you to read the rest of the article. It goes deeper than that!

Also, before we go further, I will ask for you to “save” that social share button by giving it a quick and gentle tap of it. We all know that the Google algorithm named BERT likes us to share articles about saving and investing. Therefore, a gentle and nudging click of it will make BERT really happy so that I can continue to give you guys more great content.

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Actual Math After Taxes

Benjamin Franklin didn’t say that “a penny saved is a penny earned”. However, he did say that there are two certain things in life. Death and taxes. Any money that you earn, whether it’s from a regular W-2 job or business income, you will be taxed on.

There’s no escaping it. The government will reach out and grab some of your hard earned cash to do whatever they want with it. Sure, there are various tax strategies you can do to lower your tax bill. Maybe even to zero. However, the vast majority of us actually pay at least a single dollar in taxes, whether federal or otherwise.

Therefore, the benefits of saving has to be calculated on an after-tax basis. Taxes, of course, differ by income. What I’ve done for you is actually calculate the exact number of pennies that you benefit by saving an extra penny, depending on your tax bracket and filing status.

Below outlines such data of how much of a penny you actually save based on your income! The tax rates are based on 2021. I’ve capped the maximum income at $1,000,000 to calculate the 37% tax bracket.

A Penny Saved for Single Filers

A penny saved is a penny earned for single filers.
Saving a penny is similar to making up to an extra 54%

The least amount of pennies that you need to earn to save a penny is 1.11 pennies for single filers to equal a saved penny. Note that it is NOT 1.10 pennies that you need to earn, but 1.11. This is where “a penny saved is a penny earned” saying falls through.

You actually need to earn a meaningful amount of more pennies to equal a penny saved. This is wonderful news! By saving an extra penny, you’re not really just saving an extra penny.

It is equivalent to earning 11 – 54% more. Therefore, you should cut and slash your expenses as much as you can. You’re already starting 11-54% ahead. Why not be ahead by an even larger margin?

This is all the more reason to focus on saving more money. Making more money is definitely a good way to go. However, do not let others discourage you from saving more. This chart proves that savings have a bigger impact than you think.

I personally make ~$81,000 in taxable income and approximately $110,000 in gross income. If I were to save the entire $81,000, it is equivalent to earning $94,568.5 in gross taxable income. Seems like I just got a huge raise just by saving money. A 16.7% raise.

A Penny Saved for Married Filing Jointly

A penny saved is a penny earned for married filing jointly.
The maximum benefits cap out at 50% for married filing jointly.

The extra percentage benefits that you get from saving an extra penny declines for people married filing jointly. It’s equivalent to earning an extra 11-50% penny. The benefits obviously become higher as the tax bracket increases.

However, the maximum benefit is capped at 50%, because the last taxable income bracket has a higher starting income bracket than a single filer. As a result, you realize less benefits from saving versus a single filer who pays less in taxes as income levels increase.

A Penny Saved for Married, Filing Separately

A penny saved is a penny earned for married filing jointly.
Married filing separately is largely similar to single filers

You realize the small benefit differences when you start earning towards the higher end of the income spectrum. It is in your best interest to save more than a single filer if you file separately while being married and make an exorbitant amount of income.

If you don’t make income towards the higher end of the taxable income spectrum, you will enjoy the same lifestyle as a bachelor who’s looking to find love!

There is little difference between the a single filer and a married, filing separately filer.

A Penny Saved for Head of Household

Head of household filers.
Minute differences between head of household and a single filer

The taxable income bracket for head of household is actually almost identical for single filers. It differs by a percent or two between the two starting from the 22% tax bracket to the 37% tax bracket. Therefore, head of households have an incentive to save similarly to single filers.

In conclusion, no matter what your filing status is, you should save as much money as you possibly can. Don’t let anyone tell you that a penny saved is a penny earned.

The Second Step is to Invest

Hopefully, you’re fully convinced that a penny saved is a penny earned saying is bogus. You have the tools and the knowledge now. Since you have the tools and the means under your belt to attack, now is the time to attack. The best way to attack and multiply your money is for you to invest your money.

Remember that you’re already starting off as a winner by saving money.

You’re already ahead by 11 – 54% by saving an extra penny. Imagine leaving everyone behind in the dust by investing and making an additional 7 – 10% per year. You could be better off by an extra 18 – 64%! Doesn’t that sound great? We’re not even counting the compound interest magic that happens year to year.

If you skip this crucial step, you might as well never have saved money at all. Inflation makes your money worth less every year. It’s possible to be rich by saving as much money as you humanely can. However, without investing, it is mountains harder to get there.

Let your money multiply into more money and let that multiplied money multiply into more money. It’s a ripple effect where one dollar breeds an extra dollar. Then the two dollars will breed an extra two dollars. So on, and so on.

Easier to Save than to Earn More

Cutting back on expenses is significantly easier than looking for ways to earn more money. No matter how much harder you work, it is difficult to justify a 10 – 50% yearly raise. You have to look for other avenues to earn more money such as a side hustle.

Side hustles, while lucrative, can take an exorbitant amount of time to make meaningful amounts of money. It’s much easier to let go of the daily coffee that you buy than to make up for the difference in earning more money. Saving is the building block to money success.

That’s not to say that making more money is the wrong way to go. There’s few people who will say that. However, when given the choice between taking the hard way or the easy way, why take the hard way? You’re going to end up in the same place anyway.

Your customers control your destiny if you want to earn more money by starting a business. You control your own destiny if you want to save more money. It’s much easier to convince yourself to save more money than it is to convince someone else to pay you more.

I definitely look for ways to make more money here and there. I am hoping to have a promotion in the upcoming cycle. A typical promotion raise will probably be 10%. Even if I don’t, I already know that I can depend on myself to save as much money as I can.

I already own a lot of stuff that I will ever want in my lifetime!

A Penny Saved is a Penny Earned is a Good Start

Saving something is much better than saving nothing as long as you invest your money. Remember that the next time you want to spend money. You’re not just letting go of the actual dollars you use to spend. You’re letting go of the additional money that you have to earn in order to spend that much.

Another popular misconception advice that’s given out is to think in terms of hours that you have to work. If something costs $7.50 and you make $15 an hour, you lost 30 minutes of your time. That is also incorrect. You actually lose an additional 11 – 54% of 30 minutes.

Properly accounting for your actual losses gives you a more accurate picture of your financial standing. Please correct the next person that says a penny saved is a penny earned. In reality, it is actually much more than that.

This does not even including the opportunity cost of the money that you spent, either. A dollar spent today is worth approximately $15 in 40 years, assuming a 7% rate of return. That $10 latte is worth an additional $150 in 40 years, that is a lot of money that you are giving up.

The trade off between future consumption and present consumption is always apparent in your finances. Delayed gratification is a wonderful behavioral thing you can practice to be better with money. Your future self may lose more than what your present self gains today.

Choose your trade offs wisely.

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