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.