We typically attribute Benjamin Franklin with having coined the phrase “A penny saved is a penny earned.” Though catchy, the phrase isn’t quite true.
Franklin’s statement says that saving money increases our wealth just as much as earning the same amount of money would. However, either he came up with the phrase in that period of limbo after the British had been defeated and there were still no US tax laws or else he didn’t think it through completely (or it’s possible he just wanted the phrase to have a better ring to it). The saying should be something more like “a penny saved is 1.44 pennies earned.”
The average single (that’s me!) worker in the US effectively pays taxes at a 31.5% rate, according
to data released last year by the IRS. This means that in order to have a dollar for myself I will
have to earn $1.44 (
1 / (1 - .315)). This really affects the way I think about money. I always
assumed my efforts were best focused on finding ways to increase my income. Instead I should focus
on cutting expenses and holding on to as much income as possible.
Now obviously at some point we have to be spending money and we won’t be able to save 100% of what we earn. It doesn’t make sense to save a fraction of a penny if we’re earning only 1/10 of our potential. However in an equilibrium situation an increase in saving will be 44% more effective than an increase in earning.