A Penny Saved is NOT a Penny Earned

It’s More. Much More.

pennies — Photo credit: Maura Teague via Foter.com / CC BY

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.

9260545193_45a35ac129_b — Photo credit: Nic Taylor Photography via Foter.com / CC BY-NC-ND

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An Open Letter to Millennials

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Dear Millennials,

You have a tough go of it and I feel for you. My generation the Baby Boomers grew up in post-war American prosperity which supposedly knew no bounds. However, by the 70s and 80s, fissures had started forming in the Great American Dream.

In contrast, most of you came of age smack dab in the middle of the Great Recession, the worst economic downturn of three generations. Meantime, you were told that education was worth whatever it cost, even if it meant taking out staggering student loans to pay for it.

Gone forever is a lifetime career that your grandfather enjoyed at a large corporate employer, replete with a pension and retiree benefits. Growing up, you witnessed your own parents dealing with the anxiety of relentless layoffs. You are probably disillusioned by the mind-numbing grind of a typical corporate work place and hey, I can’t blame you, having spent decades there.

But know this: you have tremendous potential and opportunity. First and foremost, you have the gift of time; time to see investments made now be multiplied many times over. You are resourceful and entrepreneurial because, well, you have to be. You know how to hustle, how to string several part-time jobs together to pay the rent. You have experienced surviving in tough times.

Are you able to begin saving? I must ask this question since I see so many of you at outdoor cafes throughout Philadelphia. But understand; I am grateful that so many of you who have put down roots in Philly. Your presence has revitalized the city. You deemed Philadelphia cool enough that you chose it over moving to Austin, Seattle or New York. And not just Philadelphia, either. Inner cities throughout the nation are booming, thanks to your efforts, energy, and vitality.

I want to hear from you and get your input, dear millennials. What are your most pressing questions about finances? How are you handling student load debt? Concerns about health care? Future aspirations? Marriage and starting families? Do you have an action plan in place for building long-term wealth? What help do you need along the way? What topics do you want to see addressed in future postings?

I look forward to learning more about your perspective on life in the twenty-first century. And please tell friends about Frugal, Wealthy and Wise.

Cheers, Paul

This posting is dedicated to my two favorite millennials: Benjamin and Abigail

Here are some avenues for providing feedback:

Email Tweet@FrugalWealthyYz Facebook

millenial-2 — Photo credit: Ted’s photos – Returns Late September via Foter.com / CC BY-NC-SA

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Practical, Pithy and Poetic: Proverbs Yields Plenty of Advice on Wealth and Money

Photo credit: KOREphotos via Foter.com / CC BY-NC-SA

The book of Proverbs, found in the Bible and the Jewish Ketuvim (Writings), is a truly remarkable work of literature. It serves up a continuous barrage of practical advice and astute observations on any number of topics. It is truly timeless: written some three millennia ago, it remains uncannily relevant into the twenty-first century.

I believe there is great benefit in studying the book of Proverbs – no matter what your religious beliefs, inclinations or background may be.

In a brief reading of Proverbs, I identified over 70 passages that address wealth, finances and money. The first passage is found at the bottom of this article

In the weeks to come, I plan to post a new proverb on the weekdays that I’m not publishing other articles. This should take us well into 2017.

Enjoy. And profit from the wisdom found in Proverbs.

Cheers, Paul

Proverb #1: Honor the Lord with your wealth and with the firstfruits of all your produce; then your barns will be filled with plenty, and your vats will be bursting with wine. Proverbs 3:9-10 (ESV)

P.S. A large portion of Proverbs is ascribed to Solomon, king of Israel: dates for Solomon’s reign are circa 970 to 931 BC. He’s the guy who said “there is nothing new under the sun.”

And for examples of contemporary Jewish ‘wisdom’, I give you…..

Showing up is 80 percent of life. — Woody Allen

Success breeds complacency. Complacency breeds failure. Only the paranoid survive. — Andy Grove (1936-2016) co-founder of the Intel Corporation. As a Jewish lad growing up in Nazi-occupied Hungary, Mr. Grove knew a thing or two about paranoia.

Scripture quotations are from the ESV^® Bible (The Holy Bible, English Standard Version^®), copyright © 2001 by Crossway, a publishing ministry of Good News Publishers. Used by permission. All rights reserved.

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You can’t spend what you ain’t got: Why You Need to Automate Your Savings

You can’t spend what you ain’t got – this line is part of a song by McKinley Morganfield, aka bluesman Muddy Waters (You Can’t Lose What You Never Had)

In reality, people today do spend what they don’t have and get buried in debt. But I seriously doubt Mr. Morganfield had an AMEX or Visa in his pocket when he left Mississippi for Chicago. Continue reading “You can’t spend what you ain’t got: Why You Need to Automate Your Savings”

The Morning Latte: Traveling the Road to Ruin on 4 Dollars a Day?

Oh that evil, much maligned, Four Dollar Latte…

Latte Author David Bach (The Automatic Millionaire) coined the term ‘Latte Factor’ over ten years ago. The point being made: small, habitual (shall we say, mindless) expenditures add up over time. This leads to a missed opportunity to save, invest and build wealth. I also make a similar argument in ‘Catch the Little Foxes’.

So, let’s pick on the 4-dollar latte. Say you stop at a local coffee shop to pick one up most weekday mornings. We will just focus on the financial cost and not the time you spend waiting in the store queue for said latte to be prepared.

That’s $4 a day, $20 a week, approximately $1,000 a year. Continue reading “The Morning Latte: Traveling the Road to Ruin on 4 Dollars a Day?”

Revisiting The Millionaire Next Door

Twenty years ago this October, The Millionaire Next Door, authored by Thomas Stanley and William Danko, made its debut. As a book, it qualifies as a timeless classic on personal finance. It was published at a time prior to the Dot-Com boom, the Dot-Com bust, 9/11 and the Great Recession. Yet, its insights on accumulating wealth remain relevant today.

No it’s not a book on managing one’s personal finances per se, but an analysis of ‘ordinary’ millionaires and how they got there. The main message: most millionaires don’t look the part or live a flashy lifestyle. They live well below their means and have invested the difference. Many accumulate their wealth as business owners. They tend to drive older cars and live in modest homes.

Continue reading “Revisiting The Millionaire Next Door”