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A Penny Saved Is Far Easier Than a Penny Earned


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The saying "A penny saved is a penny earned" has often been misattributed to Benjamin Franklin." He didn't say it quite like that, but whomever first coined the now-famous version of the phrase is even more on the money today. These days, the reality is that you need to earn far more than a penny in order for it to be worth the same as a penny you manage to save.

Considering taxes, commuting and other costs associated with working, your boss has to fork over far more than 1 cent for you to wind up with a penny's worth of spending power.

Just How Much Does It Take?

Every dollar you earn through work is subject to Medicare taxes, and unless you're earning above $117,000, you pay Social Security tax on all your earned income, too. Add in federal, state and local income taxes, and the amount your boss has to pay for you is far in excess of what you see in your bank account on payday. Once you spend that money, sales tax may further increase the cost to you -- and make it that much more expensive for your boss to hand you useful incremental spending power.

Let's start with a $100 goal. Well, to buy $100 worth of stuff, you may really need $107 in your pocket, to account for typical sales tax. Say your marginal tax bracket is 1 percent at the local level, 5 percent at the state level and 25 percent at the federal level, and that you don't itemize. Take those taxes and add in both your half and your employer's half of Social Security's 12.4 percent and Medicare's 2.9 percent tax rate, and the tax costs climb.

And, of course, it costs you money to work. Your costs will vary based on your commute, need for child care, ability to brown-bag your lunch, clothing norms in the office and many other factors. For the sake of simplicity, let's estimate that most of your costs of working are already covered, but 2 percent of your incremental salary goes toward the extra costs you'll incur by working more. It could be more meals out because you have less time to prep; it could be commuting costs; it could be a lot of things.

Put it all together, and your boss very likely has to pay you more than $201 so you can buy $100 worth of stuff. The table below shows the details:

Employer pays $201.62
Employer half of Medicare ($5.36)
Employer half of Social Security ($11.46)
Marginal salary $184.80
Employee half of Medicare ($5.36)
Employee half of Social Security ($11.46)
Marginal federal taxes (25%) ($46.20)
Marginal state taxes (5%) ($9.24)
Marginal local taxes (1%) ($1.85)
Incremental cash to your checking account $110.70
Incremental costs of working (2%) ($3.70)
What's left $107.00
Merchandise that amount buys (with a 7% sales tax) $100.00
Table from author's calculations based on assumptions in the text.

Why Saving Money Is Easier

That table shows just how difficult it is to earn additional money. For every incremental penny you want to use to buy something, your boss essentially needs to pay two on your behalf. That makes earning money a far more difficult proposition than it may initially appear.

Once you've earned your money, however, if you're able to save some of it, it gets far easier to build your purchasing power.
  • Money you save can be invested -- and potentially earn a decent rate of return.
  • The money you earn on your investments is typically taxed at a much lower rate than money you earn from working. Most people don't pay Social Security or Medicare taxes on their investment incomes, and both qualified dividends and long-term capital gains are generally taxed at lower rates than salaries.
  • While every dollar you earn as salary is taxed when you earn it, capital gains are only taxed when you sell the assets that generated them. It's possible for you to hold on to an appreciated asset for years before paying a dime in capital gains taxes.
  • Once you've saved the money, it's yours. You've earned it, paid your taxes on it and already covered the costs of working for it. Consistently save a bit from each paycheck, and soon you'll build up a decent pile of money, even before considering the potential for capital gains and dividends.
If you've never saved money before, getting yourself in the position to start saving may seem difficult. But once you've made the commitment and figured out how to get started, you'll soon find out just how much easier saving can be than earning your money in the first place.

Chuck Saletta is a Motley Fool contributor. For more on ensuring a comfortable retirement for you and your family, Motley Fool retirement experts give their free insight on a simple strategy to take advantage of a little-known IRS rule to boost your retirement income.


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