It’s More. Much More.
Yeah, yeah, we’ve all heard that famous saying made by Benjamin Franklin.
Guess what? Ben never said, “a penny saved is a penny earned.” So don’t believe everything you Google. More about what he actually did say is found further down in this article.
There are two arguments for why a penny saved is more than a penny earned.
The first reason can be summed up in a single word: Taxes. A penny saved is considerably more than a penny earned when you factor in the taxes most of us pay.
Here’s a sampling of the taxes that reduce our net wages and earnings. Note that state and local payroll taxes vary widely across the country. I included tax rates for Pennsylvania (since that’s where I reside).
- Federal Income Tax: marginal tax rate brackets are 10%, 15%, 25%, 28%, 33%, 35% 39.6% depending upon income. For more detail on Federal income tax brackets, click here.
- Pennsylvania Income Tax: 3.07% of earnings
- Municipal Income Tax: varies from none to 3.92% for residents of Philadelphia. Many municipalities in Pennsylvania extract a 1% payroll tax.
- Social Security: 6.2% on the first $118,500 earned, $7,347 maximum
- Medicare: 1.45% on the first $200,000 earned, 2.35% thereafter
- PA State Unemployment Insurance: 0.07%
Granted, taxation rules, especially at the federal level, are mindbogglingly complex. But it boils down to this: a penny saved is substantially more than a penny earned. But that also means a penny spent is significantly more than a penny earned. Here are some simplified examples to illustrate the point. These calculations use Pennsylvania income tax rates with municipal tax is assumed to be 1%.:
- Lunch at McDonalds (10% federal tax bracket): Cost: $5 Total taxes on wages: 21.79% Actual cost pretax: $6.39 A penny saved = 1.28 pennies earned.
- Pack of cigarettes (15% federal tax bracket): Cost: $7 Total taxes on wages: 26.79% Actual cost pretax: $9.56 A penny saved = 1.37 pennies earned.
- Morning latte (25% federal tax bracket): Cost: $4 Total taxes on wages: 36.79% Actual cost pretax: $6.33 A penny saved = 1.58 pennies earned.
- Monthly lease payment on a Mercedes C class sedan (28% federal tax bracket): Payment: $419 Total taxes on wages: 39.79% Actual cost pretax: $695.90 A penny saved = 1.66 pennies earned.
What are the takeaways and calls to action from this little exercise?
- Think in terms of what goods and services are costing you pretax, not post-tax. Which expenditures do you really want to spend your hard-earned pennies and dollars on?
- Be savvy about preparing your state and federal income tax returns. Make sure that you paying the least amount of taxes that you are legitimately obligated to pay. Itemize deductions on federal returns when they exceed the standard deduction.
- Pay for as many expenses pretax as you possibly can. These can include the following:
- Employees’ portion of health and disability insurance
- Out of pocket medical expenses paid via an HSA or FSA (Health Savings Account/Flexible Spending Account)
- Child care expenses paid via an FSA
- Commuting (public transportation and parking)
In future postings, I will elaborate on HSA’s and FSA’s as well as other tax saving strategies.
The second argument for why a penny saved is not a penny earned? A penny saved and invested can multiply into many, many pennies. A penny spent? Well that’s penny gone forever. See my earlier articles Pennies a Day and the Rule of 72 to review the power of compounding.
So what did Ben Franklin actually say? “A penny saved is twopence dear.”
Perhaps he meant that a penny saved can grow to become two pennies (or a twopence.)
May Ben’s words inspire you in your saving, your investing and your (judicious) spending.
© 2016 Paul J Reimold