Benjamin Franklin is famous for saying that a penny saved is a
penny earned. With all due respect to Mr. Franklin, it is possible that
he has under-estimated the return from saving. The reason for this
miscalculation is the fact that you must pay taxes on every dollar that
you earn before you have the opportunity to spend it. (Remember the
parable about death and taxes) When you add-up Federal + State + Social
Security + Sales Tax + other government fees & taxes, most people
pay somewhere in the neighborhood of 30%-50% of each incremental dollar
that they earn in taxes. This means that if you go out and work hard to
earn an extra $100 this month, you will probably end up with $50-$70
after the tax man has gotten his piece.
Since taxes must be paid
before we spend our hard earned money, we actually enjoy a greater
benefit by saving an extra dollar than earning an extra dollar. The
reason for this is because you need to earn $1.50-$2.00 first, and then
pay 30%-50% of it to the government in the form of taxes before you have
$1.00 that is available to spend. Because of this dynamic, it often
makes sense to be discriminating in the way you choose to spend your
money since it will take a lot more work to replace money that is wasted
than to avoid spending it in the first place.
Does this mean that you should become a penny-pinching tightwad? I would certainly hope not... the reason why we all work so hard to earn a living is so that we can enjoy the fruits of our labor. Saving and investing is important because it focuses us on the most important things in our lives so that we can spend less time working for the things we enjoy, and more time enjoying them. The easiest way to see this principle in action is to track your spending for 2-3 months, and then rank you're spending decisions from highest to lowest in terms of importance. I have a hunch that a significant percentage of the total dollars spent will be in the lower half of your 'importance curve.' (Every time I look at my credit card bill, I am amazed at how many transactions are on there for less than $50 dollars... it is likely that I could have done without quite a few of those purchases) The key point is not to cut every 'low importance' purchase out of your life... but rather to ask yourself whether there is something more important that you should doing with the money that is being spent.
Since taxes must be paid
before we spend our hard earned money, we actually enjoy a greater
benefit by saving an extra dollar than earning an extra dollar. The
reason for this is because you need to earn $1.50-$2.00 first, and then
pay 30%-50% of it to the government in the form of taxes before you have
$1.00 that is available to spend. Because of this dynamic, it often
makes sense to be discriminating in the way you choose to spend your
money since it will take a lot more work to replace money that is wasted
than to avoid spending it in the first place.Does this mean that you should become a penny-pinching tightwad? I would certainly hope not... the reason why we all work so hard to earn a living is so that we can enjoy the fruits of our labor. Saving and investing is important because it focuses us on the most important things in our lives so that we can spend less time working for the things we enjoy, and more time enjoying them. The easiest way to see this principle in action is to track your spending for 2-3 months, and then rank you're spending decisions from highest to lowest in terms of importance. I have a hunch that a significant percentage of the total dollars spent will be in the lower half of your 'importance curve.' (Every time I look at my credit card bill, I am amazed at how many transactions are on there for less than $50 dollars... it is likely that I could have done without quite a few of those purchases) The key point is not to cut every 'low importance' purchase out of your life... but rather to ask yourself whether there is something more important that you should doing with the money that is being spent.
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