“A penny saved is a penny earned” is a famous phrase often attributed to Benjamin Franklin. However, Ben never said these exact words (at least according to the Franklin Institute, and if he did, he would be wrong! A penny saved is much better than a penny earned. This is one reason why being frugal is such an important aspect of wealth building. Of course, frugality on steroid is even better — i.e., save more and earn more.
Thomas Stanley and William Danko in The Millionaire Next Door
Being frugal is the cornerstone of wealth-building.
Why a Dollar Saved is Better than a Dollar Earned
1. Time
Unless your income is 100% passive, you are trading your time for money. The time that you could use to do something else more worthwhile and fulfilling.
2. Taxes
Each additional dollar you earned is taxed at your marginal tax rate, along with State income tax, Social Security tax, and Medicare tax.
Here is what most average Americans can expect:
| Average IRS Marginal Tax Rate | 22% |
| Average State Income Tax | 5% |
| Social Security | 6.20% |
| Medicare Tax | 1.45% |
| Total | 35% |
For most of us, we are taking home just 65 cents on every dollar we earned at the marginal tax rate, so you have to earn $1.55 to take home $1.
Every dollar saved, is about the same as $1.55 earned
3. Inflation of Lifestyle
This one is perhaps the most important of the three. People who earn more tend to spend more. You may have experienced this lifestyle inflation yourself — e.g., when you get your yearly raises, somehow you automatically found ways to spend that extra money.
Bottom Line
It pays to be frugal and start implementing some frugal living ideas because you have to earn almost 2 dollars to replace each dollar you spent. This is just a precaution against being wasteful with your money. As good as saving money is to your finances, you will reach a limit — as such, it is a good idea also to grow your income.
You can learn how to earn more money with these income ideas.
Here are a few more related articles from other blogs:
- A Penny Saved is Worth More Than a Penny Earned at Cash Money Life
- Save More vs. Earn More: A Dollar Saved Is Two Dollars Earned at My Money Blog
- Spend less than you earn – the wrong way to think at Brip Blap
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Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.
I think the biggest point you make here is the exchange of time for wages… this is why I believe that passive income is by far the best insurance for building wealth, even if it comes a little at a time. Selling a finite (and most valuable) resource like our time for money (especially if it is in a despised or barely tolerated job) is definitely not something for happiness over the long run!
I don’t understand how Ben got the expression wrong. In order to save a penny, first you have to earn it. Then you can save the penny and grow it which is when the fun begins.
I think Ben got it right because he was trying to help America understand what it takes to become financially free.
By the way, love the new look.
True, but you can’t SAVE your way to a fortune … the amount you can save is CAPPED at 100% of what you earn (for most people, at something a lot less … like 10% of what you earn). If you want to become financially free, you must have a frugal mind-set and save … but, even more important you MUST increase your earnings. Here’s where savings/earnings come together: if you are (just managing to save something like 10% – 20% of what you currently earn, try increasing your earnings (more hours, second job, blogging, part time business/consulting, etc.) and… Read more »
I know, I too am missing the later points of your post, but a penny saved is actually worth LESS than a penny earned due to inflation. The only way a penny can become worth more is if you invest it — so a penny invested is worth more than a penny earned, but a penny saved can only increase in value in a deflationary environment.
Aren’t they trying to get rid of the penny?
JK.
The best thing to do is ignore any raises. It seems when someone gets a raise, it enters their subconscious and they feel more at ease when spending. It’s the same spending pattern, but just accentuated.
What was the inflation rate in Ben’s time?
I would not mind really having both earning money and saving at the same time.
But in choosing which is better then there really is no better option because it is how you use the money that will matter the most.
What if your saved money will be spent on paying for the dinner date you have later this week while the money you earned in the coming days will be spent for paying utility bills.
@Jerry – Great point about the value of time. @Mark – I guess you’re right if you want to put it that way. Thank you for your comment about the new look. I am glad you like it. It’s my first homemade theme and I am very happy with it. @AJC – Right and that’s why I said it’s even better to save more and earn more. That said, I do like the strategy you outlined — 50% to improve your standard of living and 50% to boost savings. @Deamiter – 🙂 Ah, so technical…yes invest! @Anthony – I am… Read more »
True story about taxes, its more like a dollar saved, is $1.61 earned.
talking about dollars, check out silver peace dollars. they’re currently worth about $15-20 (unless you have a really rare one, then they’re worth substantially more).
When Ben Franklin said ‘a penny saved is a penny earned’, he wasn’t speaking of banks, he was speaking of purchases.
If you make $100, you can buy 100 items at $1 each. If you save $1, you can buy an extra one, or 101 items.
If you earn $1 more, you make $101, so now you can buy the same 101 items.
I don’t know why schools all around the world teach this quote’s meaning incorrectly.
Are you guys serious..
I’m pretty sure he meant.. a penny saved is a lot better then working for a penny to replace the penny you just spent.
So save your pennies and stop working so hard! lol
Good tip , but in india , we say One Rupee Saved Is Better Than One Rupee Earned
I don’t know about you guys but i always found that in order to save a dollar I usualy had to earn 10,so I always told my kids a dollar saved is 10 earned.