A Penny Saved Is NOT A Penny Earned

Sept. 5, 2008

Ben Franklin is claimed to have said that "A penny saved is a penny earned." This is not true. A penny saved is usually worth more than a penny earned, often a lot more.

In the US, you don't have to pay federal taxes on any saved money, only on earnings and investment income. That means that, if you are in a 25% tax bracket, you have to earn $1.33 to end up with the same amount as $1.00 saved ($1.33 - 25% = $1.33 - $0.33 = $1.00, rounded to the nearest cent). If you are in a higher tax bracket, you obviously have to earn more for each dollar saved.

You also don't have to deduct Social Security and Medicaid/Medicare taxes from money saved, only earnings. Add another about 8% for these taxes to the 25% in the above example, and now you have to earn about $1.49 for each $1.00 saved.

Some states, counties, and cities and towns have income taxes, occupation taxes, or similar. If you assume you something like this in your area (I don't here in Florida) and it is about 2%, then you have to earn about $1.54 for each dollar saved.

Some may question these numbers. They may think that "25% of $1.00 is $0.25, so I should only have to earn $1.25 to match $1.00 saved after taxes." But, remember, you pay taxes on the total amount you earn before any deductions, not on the aftertaxes income. That is usually true for all your taxes and other paycheck deductions. So the correct way to calculate this is to add up all your deduction percentages (converted to fractions), subtract this result from 1.00, and then divide this result into your desired after-deductions amount to find the amount you need to earn before deductions. For the above example of 25%, 8%, and 2% deductions, the total we need to earn would be $1.00 / (1 - 0.25 - 0.08 - 0.02) = $1.00 / (1 - 0.35) = $1.00 / 0.65 = $1.54, approximately, for each dollar saved.

So, as you can see, these deductions take a big bite out of your paycheck. If you are earning $20/hr. and have the deductions in the above examples, that means you have to work an extra about 3.85 hours a month, not 2.5 hours as most may think, to cover that $50/month cable TV bill. When you think of your expenses in this manner, as the number of hours you have to work to earn enough to pay these expenses, you start to more seriously question how necessary are these expenses.

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