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A Penny Saved is Not a Penny Earned

We’ve all heard the phrase before. “A penny saved is a penny earned.” Perhaps your mother told you it when you were growing up. If so then her mother most likely told her it when she was growing up. Well I hate to tell you this, but your grandmother’s sorely mistaken. She may bake a mean apple pie but she gives terrible financial advice. No, for a penny saved is not a penny earned. A penny saved is much more valuable. Consider your most recent paycheck. That top line number, that’s what you earned. Your gross wages. That bottom number (the much smaller one), that’s what could theoretically be saved.

People will often justify their spending by thinking in terms of their gross wages rather than net wages. This is especially true for large ticket purchases, such as a car or house. Thinking along the lines of “oh this is only X amount of my salary, I can afford it.” Even smaller purchases are justified with this thinking as well though. Just consider my friend Jane. Jane lives in Utah and has been in marketing for several years, earning a good salary of $50,000 annually. This breaks down to an hourly wage of about $24 before taxes. Jane loves to go out with her friends and try all of the new restaurants in town. Recently she was out with friends checking out one of the new spots and, in total, her bill came to $48. Not bad for a night out she thought, she would only have to work 2 hours to cover those expenses. In reality it ended up costing Jane almost 3 hours of work to pay for the night out. Why the discrepancy? See how the numbers play out below.

As you can see from the example above, every penny that Jane saved was actually worth 1.39 pennies earned due to Uncle Sam. Everybody will be different depending on their income level, state taxes, etc. but one thing is clear. The more taxes that you must pay in the more your “penny saved” will be worth. In personal finance the two ways to increase your personal savings rate are to either earn more money or spend less. As you can see from this example it’s much more valuable to cut your spending when possible instead of chasing the extra income.

Consumers have an innate ability to justify why they need certain products. Applying the logic above has actually helped me reduce my own spending. I apply a “gross-up” multiplier to my expenses. This gives me a very clear understanding of how much income I actually need to earn to purchase something I want. It is very effective in limiting the amount of money I spend on small items. That $10 burrito for lunch? Well that was actually almost $14 (10 x 1.40) in pre-tax income. If people applied this logic prior to making discretionary purchases they would most likely walk away without purchasing the item every now and then.


Do you think that applying this sort of reasoning before making a purchase could help you cut spending? How much is your penny saved worth?

#Earnings #Income #Savings #PersonalFinance #NetIncome #GrossIncome