Mani(a)c Monday: Dollar Saved, Dollar Earned?

A dollar saved is a dollar earned. I have always loved this phrase for its principle, but it’s wrong. It should be read as a dollar saved is $1.10-$1.40 plus acquired interest over respective time. Long story short, the more you make and the more you save, the more you get. Sounds fair, right?

For anyone who is reading right now who hasn’t experienced it yet. Life isn’t fair. Get over it (and please continue to read on). Not many people ever sit down and think about how money works. Not many people whose job it is sit down and think about how money works. Why, it’s complicated. As with most everything, it’s extremely complicated and for you to wrap your head around it, say good bye to that free time. So here’s one things I’ve learned. Your return on savings is dependent on your pay scale. Why? Every dollar you earn is taxed at a variable rate dependent on your income, see IRS tax brackets for more information.

Let’s take a coupon for example. It saves you 25 cents off a $1 purchase. Great you saved 25% off of your purchase. But how much money did you effectively save? Well that depends on what you make. For the middle class that 25 cents you didn’t earn was never taxed as income, so that coupon was really more like 31 cents. For the lower class it was more around 27.5 cents. For some people, that 25 cent coupon was effectively 41.6 cents. When I first thought about this I didn’t think much of it until I realized the magnitude of this for avid savers. When Danielle and I go to a store we will often use somewhere between $2-$10 worth of coupons. Given our incomes the effective savings of those coupons are now $2.50-$12.50. OK, big deal. This is only an extra $0.50 to $2.50 for using coupons; add it all up and you’re talking an extra $26 to $130 of buying power a year, excluding the value of the coupons.

Now apply this to general bargain hunting. You know that $70 savings you got for waiting for that product to go out of season? Add another 10%-40% for tax you didn’t have to pay, that’s an effective $7-$46 dollars in savings. Couple that purchase with some coupons and the saving adds up fast. Compound that savings with the accrued interest from a savings account or investments and it makes a lot more sense.

 A dollar saved isn’t just a dollar earned.

Signed,

LD

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About Danielle Beranek

Life can get away from you when being young, married, and still fairly fresh out of college. Taking on a pet, student loans, going back to school, and soon a new house is enough to leave ones head spinning. For me, life is crazy, but only on the outside.
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3 Responses to Mani(a)c Monday: Dollar Saved, Dollar Earned?

  1. ricodilello says:

    Now you have to use the same math in investing. A dollar in interest is only worth somewhere between $0 .90 – $0.60

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  2. Gedy says:

    A small caveat, the income-tax shield you’ve described doesn’t always apply to increase how much a person effectively saved beyond the nominal value. It would apply to the money saved only if these increased pre-tax contributions to a savings/investment plan or pre-tax debt repayments. Or some other pre-tax use of money I can’t think of right now. In the former case, it will still be taxed eventually when taken out but of course that’s greatly offset by the increased returns from having more principal invested. Also, if you have a planned amount for charitable contributions then these savings could go directly to that while helping your tax write off.

    But if the money saved on such expenses isn’t going to change post-tax revenue (i.e. no pre-tax debt repayment options, maximized pre-tax savings contributions), then the $0.25 expense saved is still just $0.25 post-tax income earned. Of course, this $0.25 could go to accrue value as savings or investment, which is where that whole time-value of money comes into play.

    Please correct me if I’m wrong or missed anything important.

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  3. LD says:

    Yes you are correct. I should have been more thorough in my writing. The increased buying power only comes into play if you assume that the utilization of coupons allows you to better allocate your gross income. If you are able to do this and you spend your pre-tax income towards 401k or HSA/FSA or optimized charitable deductions. You do increase your pre-tax buying power. Now, in terms of HSA/FSA and in some cases you do retain the effective tax savings as that money will never be taxed, someone can correct me if I’m wrong. In terms of 401k, your earnings and principle will be taxed upon withdrawal at your future tax rate, presumably the same or higher. As a result, your probably not seeing the effects down of using the coupons but it does mean you get to play with more money in the mean time. More money should hopefully lead to faster returns and faster growth.

    So long story short, contribute to your HSA/FSA equal to the value of coupons you use a year?

    Someone please correct me if I’m wrong.

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