A penny saved is not a penny earned.

“A penny saved is a penny earned” is wrong and it’s wrong for a couple of reasons.

First, Franklin never actually said, “A penny saved is a penny earned.” The original quote in Poor Richard’s Almanack was

A penny saved is twopence clear

 In a later edition of his Almanack, he had changed it to,

A penny saved is a penny got.

However, the earliest recorded version of the phase was in George Herbert’s Outlandish Proverbs, circa 1633:

A penny spar’d is twice got.

The first records occurrence of the quote “A penny saved is a penny earned” appears in 1899 in Pall Mall magazine.

Regardless of who said what and where it came from the quote is wrong. At least it is now.

To be fair, when Ben Franklin wrote “Poor Richard’s Almanack”, in 1737 his version was true.

Congress didn’t impose the first personal income tax until 1861, and it was repealed in 1872. The 16th amendment was ratified in 1913 and set up the current Income Tax system. So in Franklin’s time, he would not have had to pay taxes on any income – so a penny saved would have been a penny earned. Today, it’s not quite right, it should be

A penny saved is more than a penny earned.

Saving a penny or two is always a good idea but in the modern day, it’s even more important.  By cutting expenses and saving money you are in effect giving yourself a raise. While that is good, what the original saying doesn’t take into account is the effect of taxes. You see, taxes take a toll on your earnings.

Income Taxes

In the US, you are going to pay 2019 Federal income taxes between 10% and 37%. Medicare and Social Security taxes of 7.65% in 2019.  In addition, 43 of the 50 States you will pay State income tax, and in some Cities, you will pay local income tax.  In the UK, you will pay PAYE tax of 20%, 40%, or 45% depending on your earnings, plus National Insurance.

Let's look at an example.

For example, let’s look at cutting your cable bill like I did in 2013. I was paying $86 a month for cable. When I moved in 2013, I had to switch cable companies. But instead of getting the cable turned on at my new house, I decided to see if I would really miss it. I now had $86 a month more in my bank account, that’s $1,032 a year. Now let’s look at how taxes come in to play.

Working backward is a little tricky so I’ve done the math for you and switched it around. To make it a bit easier, I am going to assume you are in the 22% Federal Tax bracket and your State income tax is 5%.

Savings Earnings
Cutting Espenses $86 per month Pay Increase $1,579.18
Federal Income Tax ($347.42)
Social Security/Medicare ($120.80)
State Income Tax ($78.96)
Total $1,032 Total $1,032

To bring home an additional $1,032 a year after taxes, you would need to earn $1,579.18 more per year. If you are earning $50,000 a year then you will need a 3.16% pay rise.

By simply cutting your expenses by $86 a month you have, in effect, given yourself a 3.16% pay raise. Go ask your boss for a 3% raise today and see what he says.

Hopefully, your boss will say “Yes” and you have just ended up giving yourself nearly a 6% pay raise. Remember, if you haven’t already done it, use that pay increase to start saving your first $1,000.

Now for full disclosure after about six weeks I did decide to ahead and get Netflix at $16 a month (there are cheaper plans) but that was still a savings of $70 a month.

So there you have it, a penny saved is greater than a penny earned. Today we need to add those two words to make it true. Maybe we should update some of the other quotes too. “The savings is mightier than the earnings”. Well thinking about it, maybe not.

Finally, for history’s sake, I’ll take credit for the latest version, circa 2018.

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