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A Penny Saved Versus A Penny Earned

Which would be better for your overall finances: reducing your spending by $1000 or earning a $1000 raise?

If we lived in a world with no taxes, they would both result in the same outcome. Alas, though. As Benjamin Franklin once said, “nothing can be certain except death, taxes, and procrastinating on your taxes.” So, we need to include taxes into our thought experiment.

If your effective tax rate is 25%, then earning an extra $1000 only translates to $750 more in your pocket. You would need to earn a $1333 raise in order to take home $1000 after taxes.

So, a penny saved is more than a penny earned. A penny saved is roughly 1.33 pennies earned.

In attempting to save 10-20% of your income towards retirement, focus first on spending less rather than finding another source of income. For those of you with children or hospital debt, this can certainly be difficult. However, it will be more difficult to try to make it through retirement with insufficient funds. If you resist eating the marshmallow now, you will have more to spend later.

 

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