Discretionary Income - A Penny Saved is More than a Penny Earned

I've heard countless times Benjamin Franklin's good old saying "a penny saved is a penny earned".

Although this might have been true during Benjamin Franklin's time, it is no longer the case. Today a saving a penny is actually worth what I express in the following algebraic formula.

A Penny Earned (X) = y(A Penny Saved)*(tax rate)

This means that A Penny Saved (x) divided by the tax rate is = to y (the penny earned) or

x/(tax rate) = y (penny saved)

In other words (or numbers) $.01/(percent tax rate) = y

Now let's suppose that your "penny saved" is actually $1,000 (maybe your first 12 months work on hubpages).

Calculate your tax bracket

If you aren't a money expert, calculate your tax bracket as the difference between what you earn and what you take home after federal and state taxes. Keep it simple. If you want to, then you can use this nifty table I just made.

I find this to be less accurate then keeping it simple as I have. You never know how many write-offs you can find in between the cracks, either way this is a good table for knowing where you stand.

$1,000 Saved vs. Earned (or 100,000 ¢)

In the 25% tax bracket $1,000 would be worth

$1,000/.75 or $1,333.33.

That's a big difference.

Now let's suppose that you earn interest off of those two figure at 7%.

Here's another very useful formula that I use every day in the financial services business.

Future value = Present Value*(1+interest rate)^(number of years)

or

Assume 10 years and calculate the difference between our penny saved and penny earned after .

So in excel this would read =$1,000*(1.07^10) for our "penny saved" and =$1,000*(1.07^10) for our "penny earned".

Go ahead and plug it in to excel. Just copy (CTRL+C) and paste (CTRL+V) into your excel spreadsheet. If you don't know what that means, then make sure you read up on some computer tips - it will save you a ton of time!

For our "Penny Saved" after 10 years we get $2,622,86 and for our "Penny Earned" we get $1,967.15. The Penny Saved is still 33.33% higher than the Penny Earned, but it is looking like it is hurting more and more as time goes on!

That was just the beginning.

The truth is that the difference is even greater!

Discretionary income = Gross income - taxes - necessities

If that formula above didn't make any sense to you, then I basically mean that "discretionary income" is your take home pay after you pay all your taxes and normal bills.

Another way to say this is if you make $60,000/year and $50,000 of that goes to my mortgage, utilities, insurance, rent, and groceries, taxes, then your discretionary income is $10,000.

Knowing this we can take our formula a step further. Basically $1 out of every $6 you make is yours to spend and save and do what you like to do with.

My point is that if you save $10, then you are saving yourself $60 of earned income.

It's amazing to me that people don't price shop and compare! As consumers many times we get in a huge hurry to get what we want when we want it. This is especially damaging with large purchases like a car or a home.

Let's suppose you purchased a car at a dealership for $16,000, and if you had spent 10 hours looking for a car you could have spent just $14,000.

Taking what we learned above that $2,000 is worth $12,000 of earned income.

To complete your analysis you should take your income and find out what you make per hour.

At $60,000 this would be

$60,000/(52weeks*40hours) or $60,000/2080= $28.85/hour

You would then have to work $12,000/$28.85 or 416 hours to make up for that loss of income!

In other words, it's probably worth the time and effort to spend that extra 10 hours to price compare! Now you are a money expert! I'll be publishing additional money hubs in the future so be sure to come back.

#%)(*%#)( My Money Saving Mom Says -

"Kids we are going to Wendy's and you each get $2 to spend however you like."

Me - "Can I spend my own money so I can get a Jr. Bacon Cheeseburger, fries, and a frosty?"

"No, that wouldn't be fair to your other Brothers".

"What if we all want to spend our own money"?

"No."

I hope you've enjoyed this hub. If you have, then please take the time to vote it up at the bottom.

Here are some more "money" hubs I have written including Information You Should Know About Finding a Financial Advisor and Understanding Mutual Fund Share Classes and Fees.