A penny saved is NOT a penny earned ..

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dm200
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A penny saved is NOT a penny earned ..

Post by dm200 » Sat Nov 11, 2017 4:14 pm

I was trying to explain this (not very successfully) to a younger relative who is "challenged" in reducing consumer debt and accumulating savings for wedding and house down payment.

If you earn, for example, $1,000 GROSS MORE from your job and put the net in the bank or pay down debt, your net is only about (give or take depending on marginal tax rate) $750.00. To have, net in pocket, you would need to earn about $1,333 MORE GROSS.

However, if you were to find $1,000 in reducing expenditures (less interest on credit cards, eating out less, fewer or less expensive trips and vacations, lower cable costs, less fancy smart phone, etc.) then you really have the full $1,000 "in hand" to go in the bank or reduce debt.

So, I guess it would be "A dollar saved is $1.33 earned"

H-Town
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Re: A penny saved is NOT a penny earned ..

Post by H-Town » Sat Nov 11, 2017 4:25 pm

Let's not make it complicated. A dollar is a dollar. If you spend a dollar, it's gone. If you save a dollar today, you will have a dollar today and probably two dollars 9 years down the road. (72/8%)

RudyS
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Re: A penny saved is NOT a penny earned ..

Post by RudyS » Sat Nov 11, 2017 4:30 pm

Different ways to look at it. If I save a buck at the store by buying a less expensive item, I have a buck more. If I earn a buck more, I have 70 cents more than before. That is to say, pretax dollars are not the same as after tax dollars.

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White Coat Investor
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Re: A penny saved is NOT a penny earned ..

Post by White Coat Investor » Sat Nov 11, 2017 4:34 pm

That very point was made quite well years ago by Andrew Tobias in his best-selling The Only Investment Guide You'll Ever Need.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

vtMaps
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Re: A penny saved is NOT a penny earned ..

Post by vtMaps » Sat Nov 11, 2017 4:41 pm

dm200 wrote:
Sat Nov 11, 2017 4:14 pm
If you earn, for example, $1,000 GROSS MORE from your job and put the net in the bank or pay down debt, your net is only about (give or take depending on marginal tax rate) $750.00. To have, net in pocket, you would need to earn about $1,333 MORE GROSS.
But earning the extra $1,000 may increase your SS and/or pension, and may come with other work related benefits.

--vtMaps
The optimist proclaims that we live in the best of all possible worlds; and the pessimist fears this is true. --James Branch Cabell

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rocket354
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Re: A penny saved is NOT a penny earned ..

Post by rocket354 » Sat Nov 11, 2017 4:44 pm

RudyS wrote:
Sat Nov 11, 2017 4:30 pm
Different ways to look at it. If I save a buck at the store by buying a less expensive item, I have a buck more. If I earn a buck more, I have 70 cents more than before. That is to say, pretax dollars are not the same as after tax dollars.
Exactly. $1 saved is exactly the same as $1 more in what gets direct deposited into my account every payday.

However, many people look at things differently. As an example, if someone makes $20/hr the rationalization I will often hear for spending $20 on a meal rather than cooking at home is that it's only an hour of work. Well, by the same concepts as discussed in the OP, it's really more like an hour and a half.

People seem to focus on pre-tax income values ($x/hour or $xx,xxx/year) when assessing income, when they really only receive into their bank accounts $0.75x or really, only $0.50x if they're saving properly. That makes the relative cost of most items 2X as large as the number many people seem to use--A $1000 TV seems ok to someone thinking about their $100,000 annual income, but said person might only have $50,000 to spend in any given year.

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Re: A penny saved is NOT a penny earned ..

Post by Woodshark » Sat Nov 11, 2017 4:49 pm

White Coat Investor wrote:
Sat Nov 11, 2017 4:34 pm
That very point was made quite well years ago by Andrew Tobias in his best-selling The Only Investment Guide You'll Ever Need.
Over 20 years later I remember that book and that point very well.

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JoMoney
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Re: A penny saved is NOT a penny earned ..

Post by JoMoney » Sat Nov 11, 2017 4:54 pm

Quite right... and as Mr.Bogle teaches about investing, a penny saved means higher risk-adjusted returns. If some savvy money manager might earn you .50% above market returns but charges a 1% fee your net is not-so-good and likely taking higher risks ta'boot.

Likewise with leverage, you take all the risk, but have to share some of any hoped-for additional earnings, whether you earn anything extra or not, with the lender.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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arcticpineapplecorp.
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Re: A penny saved is NOT a penny earned ..

Post by arcticpineapplecorp. » Sat Nov 11, 2017 5:02 pm

-- Money not spent is money that is in one's pocket.
-- It is as useful to save money that you already have as it is to earn more.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

DrGoogle2017
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Re: A penny saved is NOT a penny earned ..

Post by DrGoogle2017 » Sat Nov 11, 2017 5:21 pm

I’ve always think of it as $2 earned for every dollar I spend. It’s easier to think in whole number.

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dm200
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Re: A penny saved is NOT a penny earned ..

Post by dm200 » Sat Nov 11, 2017 5:31 pm

What I see many "financially challenged" folks do often goes something like this:

1. Get a raise or new job earing $5,000 per year more.

2. They spend (or commit) $5,000 more in spending or obligations soon after

3. At the end of the year - they wonder why they are deeper in debt.

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FIREchief
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Re: A penny saved is NOT a penny earned ..

Post by FIREchief » Sat Nov 11, 2017 5:50 pm

RudyS wrote:
Sat Nov 11, 2017 4:30 pm
Different ways to look at it. If I save a buck at the store by buying a less expensive item, I have a buck more. If I earn a buck more, I have 70 cents more than before. That is to say, pretax dollars are not the same as after tax dollars.
Sounds like Mustachians might have a 30% edge on Bogleheads. :oops:
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

H-Town
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Re: A penny saved is NOT a penny earned ..

Post by H-Town » Sat Nov 11, 2017 5:58 pm

dm200 wrote:
Sat Nov 11, 2017 5:31 pm
What I see many "financially challenged" folks do often goes something like this:

1. Get a raise or new job earing $5,000 per year more.

2. They spend (or commit) $5,000 more in spending or obligations soon after

3. At the end of the year - they wonder why they are deeper in debt.
Wishful thinking: If they keep increase their income, sooner or later they'll have something left to save. It's still better than folks who spend money they don't have and live paycheck to paycheck with no prospect of higher income. Neither is financially smart though.

Ron Ronnerson
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Re: A penny saved is NOT a penny earned ..

Post by Ron Ronnerson » Sat Nov 11, 2017 6:28 pm

For this reason, I tend to be more focused on the spending side than the earning side. We’re at the top of the 15% federal bracket so are not exactly high earners. This is what would happen to each additional dollar we earn: 25% federal tax, 8% state tax, 5% tax increase for falling into the phaseout for the child tax credit, 10.25% contribution toward a pension (or 6.20% for social security if the dollar earned is by my wife), 1.45% for Medicare. We would see roughly 50 cents on our paycheck for each additional dollar earned (though my pension or wife’s social security would be slightly larger than it might be otherwise).

My wife and I choose not to work beyond the 30 hours a week that we average. We’d rather have the time than the money. We still have the stuff that we want and are still able to save a decent percentage for the future. The nicest part, though, is it means that we don’t have to put in long hours and can instead spend those together as a family with each other and our three-year-old.

Not only is a penny saved not a penny earned, there could be another hidden tax of earning pennies that might possibly be even more taxing than the amount shown as deducted on a paycheck: the loss of time that one has left available.

Each additional dollar earned is not only taxed at higher rates, but it’s marginal utility begins to diminish as well. At the same time, the time taken to earn those extra dollars are the most exhausting and also the most precious. One can be taxed in ways other than just financially. I know not everyone sees it this way but that's sort of how I look at it.

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teen persuasion
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Re: A penny saved is NOT a penny earned ..

Post by teen persuasion » Sat Nov 11, 2017 7:03 pm

RudyS wrote:
Sat Nov 11, 2017 4:30 pm
Different ways to look at it. If I save a buck at the store by buying a less expensive item, I have a buck more. If I earn a buck more, I have 70 cents more than before. That is to say, pretax dollars are not the same as after tax dollars.
Does it not also matter where I save that buck? If we save that buck in DH's 401k, we avoid federal and state income taxes, and further increase our refundable credits like EITC. As the phaseout on EITC for us is 21%, and our state matches fed EITC at 30%, our tax refund increases .21 + .063 = .273 for every buck we save for retirement. So now I have $1.27.

Herekittykitty
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Re: A penny saved is NOT a penny earned ..

Post by Herekittykitty » Sun Nov 12, 2017 1:01 pm

Looks like Benjamin Franklin's wise words in the early 1700's are even wiser today.

"A penny saved is a penny earned" was wise advice then. Presumably instilling the wisdom that saving was a itself a virtue, not inferior to the virtue of earning.

Perhaps he would say now that a penny saved is better than a penny earned. Although he would likely rate both saving and earning as virtuous.

On the other hand, being the smart fellow that he was, he might go on to say today, "a penny saved is an opportunity to invest in a low cost index fund, thus surpassing the initial value of the same penny saved or even more pennies earned."

:D
I don't know anything.

Teague
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Re: A penny saved is NOT a penny earned ..

Post by Teague » Sun Nov 12, 2017 1:08 pm

Herekittykitty wrote:
Sun Nov 12, 2017 1:01 pm
Looks like Benjamin Franklin's wise words in the early 1700's are even wiser today.

"A penny saved is a penny earned" was wise advice then. Presumably instilling the wisdom that saving was a itself a virtue, not inferior to the virtue of earning.

Perhaps he would say now that a penny saved is better than a penny earned. Although he would likely rate both saving and earning as virtuous.

On the other hand, being the smart fellow that he was, he might go on to say today, "a penny saved is an opportunity to invest in a low cost index fund, thus surpassing the initial value of the same penny saved or even more pennies earned."

:D
Franklin was accurate at the time. Personal income tax didn't come to be until 1861.
Semper Augustus

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