Benjamin Franklin coined (no pun intended, really) the expression, "A penny saved is a penny earned." But a penny saved is really more than a penny earned, if you think about it. Why?
Ben Franklin came up with his enduring aphorism before we had a federal income tax system. And Social Security and Medicare taxes. And state income taxes. And local income taxes. See where I'm going here?
How Much Is a Penny Really Worth?
You can earn your penny from employment or investments. Let's focus on employment. Employment earnings are subject to federal, state, local and FICA (Social Security and Medicare taxes). Let's say your marginal income tax rates (the rate at which you are taxed on an additional penny of income) are 28% federal, 5% state, 2% local and 7.65% FICA. That's a total of 42.65%. So a penny earned is really 1 cent minus your marginal income tax rate of 42.65%. In other words, your penny is actually worth 57.35% of one cent, or $0.005735 after income taxes.
To spend one penny you have to earn 1.74 cents because 1.74 cents after taxes of 42.65% is one penny (1.74 x 42.65% = 74 cents of taxes, leaving you with 1 cent).
Put another way, to spend $100 you have to earn $174 dollars of employment income. To spend $1,000, you have to earn $1,742. To spend $10,000, you have to earn $17,420. Pretty soon you're talking serious money.
"To spend a penny, you have to earn more than a penny. "
Spending Costs More Than You May Think
You get the picture. It costs a lot more to spend money than meets the eye, when you consider what you have to do to earn it.
A penny saved is more than a penny earned. You heard it here first!
About Bruce J. Berno, CFP®
Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.