A Penny Saved Is a Penny Earned

“A penny saved is a penny earned” is a saying frequently attributed to Benjamin Franklin. It may have been accurate in his time, but he would probably be quite surprised to find out how inaccurate that saying is today.

If you save one thousand dollars how much do you have available to spend? 

$1000, right?

Okay, what if you earn $1000. How much do you have available to spend?

Federal tax brackets range from 10% to 37% and the average American taxpayer pays an effective rate of between 13% and 15% according to the most recently available data. So, if you are that mythical average American, you’ll be able to keep roughly $860 of that initial $1000 that you earned. But, don’t forget, you must also pay Social Security taxes. That’s another 6.2% and if you’re self-employed it’s twice that much. So, conservatively, you would be able to keep around $800 of the original thousand dollars that you earned. But the federal government isn’t finished with you yet. You also have to pay Medicare taxes. Today that tax is only a little over 1% so that means you get to keep roughly $790.

So, if you earn $1000 you only get to keep…. Oh, wait a minute. Most states also have a state income tax. State income taxes range from 0 to 13% and projecting how much you must pay based on where you live is even more complex than calculating your federal taxes. For simplicity sake, let’s assume your state income tax at the average level of household income is only 3%.

So, if you earn $1000 in a state that has a state income tax, you get to keep $760. If you save $1000 in a state with a state income tax, you get to keep…. $1000.

With all due respect to Benjamin Franklin, these days, a penny saved is worth far more than a penny earned.