"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Congress didn't impose the first personal income tax until 1861, and it was repealed in 1872.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.

At some point in time you are going to need some cash to pay for those thing life throws at you.  It has a funny way of kicking you when you're down.  And when I say funny I mean Not Funny!

So we need to add some padding so when life does kick us it doesn't hurt so much.  What's that padding?  Emergency Savings.

Emergency savings typically means three to six months of living expenses in the bank if your employed full-time.  If you are self-employed, freelance, consultant, etc, then you should really have nine months to a year saved up.  I prefer online savings accounts but we'll get to that in a second.

Step 1 - Where to start?

Sometimes when we are starting out we have little to no savings.  If you already have a $1,000 or more then you can skip to the next step.  Congratulations!

For the rest of us, saving three to six months (or more) of expenses when you have nothing is quite daunting.  So forget about that for now and concentrate on saving just $1,000.

Having $1,000 in the bank will cover probably 80% of the emergencies that get thrown at you.  You know, that car repair bill or the unexpected medical emergency.

Now I already hear your excuses, I can't afford to save $1,000 this month, I'm living paycheck to paycheck, etc.  And that exactly what they are excuses.  You don't have to put it all in savings today.  Do a little bit every month and it will start to add up.  If you are serious about becoming financially secure, independent, or free., then you have to start some where and this is it.  Start Saving!

I've got a little secret for  you on the quickest way to get your initial emergency savings a huge head start.  Want to know?

For most people that is enough to have one month+ of expenses in savings.  If you do that, not only will you have this step done you'll be well on your way through the next.

But don't wait until tax time to start saving set it up now and start saving as much as you can, $50 per month, $100 per month.  Even if it's only $10 a month you will be much better off than waiting.

This also works for Bonuses too.

Remember I said I would get to online savings accounts?  Well, here it is.  Where do we keep this emergency money?  We need to keep it some where safe and easy to get to when we need it.  Now we are not going to be able to make a lot of interest on money we keep in a safe place but that's alright.  That's Not what this cash is for.  But we might as well make as much interest as we can and that is usually in an online bank savings account, like Ally.  Which is what I use for my emergency cash.  Some credit unions have some higher rate savings accounts which is great.  Just make sure you are using a savings account.


Step 2 - Pay down any debts.

Now that you have $1,000+ in the bank what's next?

Well, there is a bit of debate about this.  You may agree or disagree with me but this is how I did it.

If you have no debt, other than your house payment, just continue saving every month until you reach your goal.

Now if you are like me when I started, you have debt.  In that case, continue saving a little bit every month, $10, $20, or $50.  And use the rest to start paying down your debts, credit cards, auto loan, personal loans.

I used the avalanche method, a twist on the snowball method of debt reduction.  You can read it my other post here.

Remember to continue to use your bonuses, pay raises, and tax refunds to accelerate your debt repayment.

Once you have paid off your debt use all that money to finish your emergency savings fund.  The other great thing about paying off your debt is that as you lower your monthly expenses, i.e. your loan payments, you lower the amount you need in emergency savings.  As I will show you in the example below.


Step 3 - Celebrate

Now that you have three to six months of savings, or more if you're self-employed, celebrate (a little).  Go out for a nice dinner, or out to the movies.



I've tried to avoid using examples because the numbers can look quite discouraging.  Please don't let that happen.

 I'm completely making these numbers up for ease of the math.  You should use our spreadsheets to calculate your actual numbers.

Lets suppose we are working full-time and our current monthly expenses are $3,000 with $1,000 of it is debt repayments like auto loans and credit cards.  

Monthly Expenses X 3 months to Monthly Expenses x 6 months

$3,000 x 3 = $9,000

$3,000 X 6 = $18,000

Therefore, our emergency savings should be $9,000 to $18,000 (see I told you).

So we start out by saving our $1,000 which will leave us $8,000 to $17,000.  We continue adding a small amount to it while we are repaying our debts.  We will ignore that for now, it's mainly used to build the habit of savings.

Now suppose after 12 months we have paid off some of our debts and will only need $2,500 a month to pay our expenses.  The effects are quite impressive.

$2,500 x 3 = $7,500

$2,500 x 6 = $15,000

That only leaves us $6,500 to $14,000 left. Cool.  But what happens when we finish pay off our debts.  Then we need a total savings of $6,000 to $12,000.


Going back to our original three months of savings we needed $9,000 with saving $100 a month it would have taken us 7.5 years to save up that amount.  But once we lowered our expenses we would on need 5 years of savings.  However, if you are like most us and getting $3,000 refund a year you could your emergency savings in less than three years.

Advanced Strategy - Where to stuff it

And it's not under the mattress!

For those of you who are a bit further along your financial independence journey and can tolerate a bit more risk.  We can make our emergency savings work a little hard for us.  If you are just starting out in your journey to financial independence you should start with all your savings in a bank savings account, preferably an online bank.  As you move further along your path you can begin to take a little more risk.

Growing up financially
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Growing up financially content is for educational purposes only and should not be used for investing real money. Growingupfinancially.com is not an investment adviser, brokerage firm, or investment company. Christopher Graham and growingupfinancially.com are not professional money managers, accountants, or financial advisors. Any investment involves the taking of substantial risks, including but not limited to, complete loss of capital. Every investor has different strategies, risk tolerances, and time frames. Contact a professional certified financial advisor before making any financial decisions.
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