Why a penny saved is more than a penny earned

26Mar09

With all the ads promising to save you money these days, I’m surprised that more companies aren’t talking up the old adage, “A penny saved is a penny earned.” Actually, even those that do take this approach usually fail to point out the best part of it. Specifically, saving a penny is even better than earning a penny, since earnings are subject to taxes, but money you save from after-tax earnings is entirely yours to keep.

For example, say that your marginal tax rate (including income tax, social security, medicare, etc.) is 25%. This means that for every extra dollar you earn, you’ll keep 75 cents. Doing the math, to net a whole dollar in extra take-home pay, you’d have to earn about $1.33 in additional salary. If you’re curious, the formula for how much you have to earn in order to net out a dollar after taxes is 1/(1-marginaltaxrate), which in this example is 1/(1-.25). In any case, saving a dollar through smarter shopping helps your finances more than earning a dollar more at work.

What should advertisers do with this? At a minimum, I’d like to see some ads that talk about how much a typical shopper might save each month — along with the salary increase that it’s equal to. Sure, they’ll have to use some assumptions to figure out the typical tax rate of their shoppers, and make those assumptions clear in the ads. Some customers might even find the ads misleading. Even so, I think people deserve to know that the old adage holds true today, and that every dollar they save might pay off more than they expected.



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